My Views on All Asset Classes

Aug 13, 2020

Vijay Bhambwani, Editor, Fast Profits Daily

A lot of my viewers have asked me for my opinion on how markets will move based on the direction of the rupee.

Who am I to turn down a request?

So here it is. My definitive video on all asset prices for the near future.

Let me know your thoughts in the comments.

Hi, this is Vijay Bhambwani here and in today's video, I'm going to address some queries that I have received from the viewers of my video about the currency peg, how it impacts the market, how it impacts various asset classes like equities, commodities, bonds and real estate and how it impacts inflation. Inflation, as some people, especially all the older veteran traders call the misery index because higher inflation is supposed to make people feel miserable, how it also impacts inflation.

So, first of all, let's see where the Indian currency was vis a vis the four currency pairs that are allowed on our currency exchanges, the stock exchanges which also allow currency trading.

On the NSE it is the currency derivatives segment of the CDS. Now, as on 31st March 2020, the USDINR which is the dollar against the Indian rupee, was at 75.81. As of Friday seventh of August 2020, it was 75.11. So typically the dollar was lower against the rupee or so it seems. I'll come to why I'm saying or so it seems.

The euroinr, which is the euro versus the Indian rupee as on 31st March was 82.88. As on Friday, seventh of August it was 88.76 which means the euro was higher against the rupee by approximately Rs 6.

REVEALED: The Secret to potentially Making Rs 18,870, Rs 9,425 and Rs 7,315 in a Single Day...

The British pound sterling, which on 31st March 2020 was 93.35 as on seventh of August was 98.21. The British economy isn't really doing too great. They have a great deal of problems with Covid infections. There is also this Brexit related slowdown which is occurring in the economy. But still the pound has gained almost Rs 5 vis a vis Indian national rupee.

The JPYINR, the Japanese yen versus the Indian rupee as on 31st March started off at 69.57. As on seventh of August was 71.0. That's almost a buck and a half. So the yen has also gained against the rupee.

Which means besides the USDINR, the Indian rupee seems to be a weakening against the other currency pairs but is the Indian rupee strengthening against the dollar, which is one way to look at it or is the United States dollar weakening against the other currencies?

If you think both are one and the same, I beg to differ. They are not the same. The rupee gaining versus the dollar is one thing and the dollar weakening against the rupee is another thing. I'll tell you what the Dixie or the US dollar index has done.

On 31st March 2020, the dollar index was 99.9 and as of seventh of August 2020, in spite of a big rise on seventh of August, it has only managed to close at 93.41 which means the US dollar index is down six points.

In my video a couple of weeks ago about how the US presidential election this time around is different because apart from the stock market, which seems to be going up and favouring Trump, the dollar index is falling, which is not the standard operating procedure. The real estate market is falling, employment numbers are coming down, the US debt is going up, and bond yields are falling.

So it is the dollar which has weakened against the global basket of currencies. Which is why it appears to be stable against the Indian rupee but a little bit of rally in the dollar will see the USDINR jump again. So typically speaking, the Indian rupee is weakening. How does it impact you? I am going to take a multi asset class look at it.

Equity shares. If it all your company is manufacturing something which consists of a huge amount of raw material that is import dependent, bad news because the Indian rupee is weaker, every raw material that this company imports to convert to finish goods will now become expensive, which means the input costs will rise. Will they be able to pass on this price rise to the consumer? Entirely depends on what kind of market share that is has. If the market share is big enough, the price rise can be passed on which unfortunately will result in higher inflation and I'm going to come to that later.

If at all the company whose stocks you're buying is an export oriented company, don't just jump up and down with joy like a major portion of the finance industry celebrates whenever the rupee declines against the dollar. They automatically assume that the dollar rally will automatically benefit the exporter, which is a false notion. I come from a family of business owners. I can tell you that clauses building to export contracts which says if the exporter, which is India, stands to make any kind of extraneous or sudden gains due to the depreciation of the Indian rupee or appreciation of the US dollar, the prices might get recalibrated. So don't think the foreign buyers are dumb enough to allow you to take the entire appreciation of the dollar and put it in your pocket. They will renegotiate rates. So the benefit is not trickling down to you of 100%.

What happens to inflation. Now here is a kicker. You are, as Equitymaster viewers, discerning enough, smart enough to understand and remember that I keep talking about crude oil and natural gas a lot. Natural gas has shot up and India is import dependent where fossil fuels are concerned. So as the rupee weakens against the foreign currencies, even if the price of fossil fuels is constant in the foreign markets, it will cost more in India because the currency which we use to import it, which is the rupee, is weakening. Unfortunately, natural gas prices have jumped up significantly in the last fortnight or so.

Crude oil prices are also showing signs of rally in a little bit as the OPEC plus kind of keeps artificial measures in place, which is to create shortages by cutting output. Even if output is raised and crude oil prices do fall, they are still higher than what they were as on 31st March, which is where the problem is.

Now crude and natural gas are what we called multiplier commodities. You raise the price of crude oil significantly and the prices rise at the petrol pump for both CNG and petrol and diesel. You will immediately realise that your fruits and vegetables, your milk, your eggs, your meat, your textiles, footwear, medicines, etc, with a slight lag, might just start costing more. Now this is something what is known as imported inflation. It's not inflation specific to India but because the rupee has weakened against the dollar and whatever you are importing, especially fossil fuels, has become more expensive. The landed cost of stuff will become more expensive.

So what can become more expensive? Your edible oils because we import a lot of crude palm oil. So, your edible oils might become more expensive. Your mobile phones, your laptops, your computer, your electronic items will become more expensive.

What can happen to equity shares whenever inflation rises? Now remember, I told you, will come to inflation later. Now here is that later. Whenever inflation rises, mankind being mankind will first focus on survival. So an average Indian investing family will first fill their stomachs. They will buy food and essential items like medicines, clothing etc first, and whatever is left will be invested in equities. So, if inflation goes up, allocation to equities can come down, which is not what we want. Therefore, I want and I am hoping and praying that the Indian rupee gets its strength back against the entire basket of major currencies that are available to us to benchmark against.

What happens to bonds? Now as you are seen, I have been talking about inflation a lot in the last decade or more that I have been on social media and unfortunately, it's not a very well understood topic. People sometimes do tend to believe that I am worrying a bit too much, just like an old man.

Unfortunately, inflation has a direct benefit on yields. As and when inflation goes up, the fixed income investor's yields starts to fall. Now two things happen. Either you pump in more money into a fixed income security, which you may or may not have, to maintain the rupee value of the interest that you receive every month. Or you start to take higher amount of risk and deploy money in riskier assets, which might be giving you a higher rate of return so as to compensate for the shortfall from fixed income securities.

Unfortunately, risk is risk. The reason why it's called risk is once in a while, like karma, it will bite you. So, some trade or the other will go wrong, and you will see a contraction in your NAV. So a week rupee might just give you a unfortunate jolt to your equity portfolio at some point in time in the future.

Bond prices? People will run for cover because sovereign bonds, as the word sovereign suggests, are guaranteed by the central government of India. Now, since the central government of India also controls the printing presses, people like me believe that sovereign bonds safer because if the government runs out of money to repay the investor, they'll simply run around the presses over time, print a lot of currency and pay back the money to the investors.

Unfortunately, the money that you will receive will buy lesser and lesser goods and services, because it will erode it's purchasing power but hey, at least get back something. Private sector may not give me any money back at all. So people will rush to buy sovereign bonds and those sovereign bond prices might just go up, which means your bond yields will come down.

That means people, which you are witnessing in the last year and a half, are even deploying, in the case of overseas countries, money in bonds that are actually yielding negative yields, which means you're paying the bond issuer to look after your money, and if you think it's a chicken feed money that's going into negative yields, let me open your eyes for you. US $15.7 trillion. Yes, US$ 15.7 trillion is invested in bonds that are giving negative yields. That is the risk aversion that has come in the market.

What does it mean for F&O traders? We talked about equity. What does it mean for F&O traders? Direct impact. Direct impact. If you were a calendar spread the trader, which means you see the August future of nifty trading at 11,200, you see the September future of nifty hypothetically trading and 11,300, there is a Rs 100 spread. So you go long August and you go short September. This is called the calendar spread because you're taking exposure across to monthly expirees in order to capitalise on the difference of the Rs 100.

In the good old days, about a year and a half ago, you could get up to three quarters of a percent spread between one month to the next. If you're following me on social media, you will see that the basis is now negative most of the times, most of the days, and the cost of carry is so pathetic that you might see a difference of no more than Rs4 to Rs 5 cost of carry from August to September. So the calendar spread guys have been punched in the face.

What about option writers? Your yield on writing options, which is not exactly 100% risk free, you are taking an element of risk, the yield has halved as compared to what it was almost a year, year and a half ago. Volatility has risen. Your risk has risen and therefore the return on investment has now come down.

So a weak currency is not something that we look forward to. I will keep updating you on what the currency outlook is right now, but at this point in time, the USDINR is very, very, interestingly poised at a time where the market can turn on a time. This is a heads up for you and if it all you on an importer, you're somebody who is dependent on the currency peg for determining whether that particular import deal will result in a profit or a loss you might need to note it and take cover, take hedges.

Equity investors, bond investors, buckle up. You might be him for a somewhat of a rough ride. Commodity traders are actually likely to benefit because this move is likely to be inflationary. And what is inflation? Nothing but a rise in raw material prices. So you might just see hard assets getting a boost over a period of time. I'm talking of months and quarters, not just days. This is not for traders. Over a period of time, hard assets, especially bullion, might just give you not only a store of value, a place to hide, a place to protect your money, but also capital appreciation.

In the near term, sure enough, I expect a lot of volatility because my Weekly Cash Alert subscribers were told last year in June to buy physical bullion both gold and silver. The Fast Profits Report subscribers have received the buy call in January 2020 followed up two months ago to buy both gold and silver and are sitting on deep profits. So a little bit of volatility to my long term subscribers may not mean much, but the Johnny's come lately who bought bullion very recently, they might see a little bit of volatility, but the long term picture still remains intact.

Now this was the request that many of you guys sent. A break up of an asset class wise outlook based on the currency peg. Here you are. I hope I've satisfied your queries. More in the near future.

If you're watching this video on YouTube, don't forget to click like on this video and subscribe to my YouTube channel. In the comments section, do let me know what you think of this video and what else you would want me to record in my next videos and help me spread the cult of knowledge based investments and trading by reaching out to fellow investors and traders.

Refer my video to your family and friends. Also join Equitymaster's Telegram channel with the handle Equitymaster official. I keep posting a couple of posts every day, which would help you to take trading decisions. Do take very good care of your health, your trade, your family, your investments. Have a very profitable day.

Vijay Bhambwani signing off for now till we meet again in my next video. Thank you for watching.

Stay safe and have a great trading day!

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

Recent Articles

Dollar at 80? March 3, 2021
Can the rupee depreciate to 80 against the US dollar? In this video, I'll show you what the charts say.
Why Rising Bond Yields Spooked the Market March 2, 2021
The stock market has been worried about rising bond yields recently and for good reason. In this video, I'll tell you why.
Beware the Ides of March March 1, 2021
The month of March is usually difficult for traders. This time it will be even more so. Find out why in this video.
NSE Glitch: Why Did the Market Go Up? February 26, 2021
In today's video, I'll discuss why thew stock market went up on Wednesday, 24 February 2021, when the NSE had to shut trading due to a technical glitch.

Equitymaster requests your view! Post a comment on "My Views on All Asset Classes". Click here!

3 Responses to "My Views on All Asset Classes"

Vijay Bhambwani

Sep 1, 2020

Thank you for the kind words. This service is for you. Keep the feedback coming.

Like 

thekkere narayana

Aug 19, 2020

i have not yet decided

Like 

Ravi Ramaratnam

Aug 14, 2020

Excellent write up.. Very well explained in layman terms and without using any jargon..Thanks Vijay and according to me, you are the biggest ASSET for Equitymaster!!!!!!

Like (3)
  
Equitymaster requests your view! Post a comment on "My Views on All Asset Classes". Click here!