The Central Committee’s communique marks the first step in the official roll-out of the 2016-20 blueprint. More details are expected in coming days with the release of the draft plan. This deviation from the past shows the paradigm shift that China has gone through in the past decade.
The properties have shifted from population control to building a consumer base for its huge manufacturing setups.
We will analyze these policy decisions very closely in the coming days.
Indian market ended deeply in the red . It was also the ending of the Oct series. The strategy for now remains to be short with stops in place .
We are entering a very volatile phase for this market , so please return to your seats , fasten your seat belts and prepare for turbulence.
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China's moving away from one child policy shows the paradigm shift that China as a country has gone through . From an overpopulated country trying to feed its millions to a country with a growing middle class and rising labor costs!!
What can India do replicate similar growth levels ?
Coming back to China world has to realize that ‘ The tree doesn't grow to touch the sky ‘
As we plant a seed and the sprout comes out , and then it spreads its roots and grows very fast . But can we extrapolate that same rate of growth for the next 100 years !! Of course not ! As the tree grows older and bigger its growth slows down . Same with our economies .
Thus China cannot continue to compensate for slowdown in EU , Brazil , Russia et all forever . Growth has to moderate to more sustainable levels . And for the size of Chinese economy 6 to 6.5 pct should be considered very good. However China has set very high expectations . It's like the student who always scores 100 out of 100 in all exams . For her 99 is bad and if it’s 97 then Oh my God , she must have got brain damage!
China has to now temper world expectations without creating panic. But financial market knows no middle path . Its either euphoric or expecting Judgement day and end of civilization. ( Risk On / Risk Off ) On this the Chinese Government is not in a very enviable situation!
The perceived lack of transparency and reliability of data from China also adds to the problem . Being transparent is easier but changing perception is much more difficult .
We may conclude ‘ It's not enough to be honest , one also needs to be perceived as honest ‘. China in the past bothered little about the perception of the outside world , but this time it's different . The country cannot afford a major capital flight even if it's for the wrong reasons .
Fed as expected has not changed interest rates in the Nov meeting .
However the most important part is Fed has made it clear that a Dec rate hike should not be ruled out . ( Market should keep pricing in the probability of a rate hike in Dec)
It's not definite but there is always a probability of Fed action in Dec based on US data on employment and inflation . However they will keep global growth concerns ( Read China slowdown ) in mind .
However markets are happy that at least nothing happened in Nov . So risk is On for today . This happiness is bound to be very short lived as Dec comes closer and the we will have China growth projections to deal with.
Oil started its downward journey after a bit of rest . China worries pulled down global markets .
Indian markets declined and sentiments remain weak . We may see further decline in Indian equity market today .
We have to keep an eye on any action by the Chinese Government to restart the slowing economy . Any big bang announcement can quickly turn sentiments . However for now October gloom continues.
The People's Bank of China (PBOC) said on its website that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.35 percent effective from Oct. 24. Chinese government has been trying their best to kick start the slowing economy .However the very fact that they have been repeatedly reducing interest rates shows that things have not improved as per their expectations.
We will also get a glimpse into the next year growth planning from the Chinese Government. It looks like the they are trying to talk down the market expectations . The market expects anywhere between 6.5 to 7 % in the planning stage.
We will also have a result heavy week both for US and India markets. The Asian markets including India may open in green due to the China effect. However October has generally been a bad month for the stock markets.
Some mornings looks definitely sunny and cheerful . Other times we have an overcast sky with clear signs of heavy rain and thundershower coming .
But then there are those days which is neither here not there. Where the sun struggles with the clouds with no clear winner .
Then while having your morning tea you wonder whether to carry your umbrella , or whether to take the risk of taking your car out.
There is a lot of haze in Singapore now. But Singapore has nothing to do with it . Its something to do with pollution and faulty farming in Indonesia. But haze doesn't understand political boundaries. It travels all the way to Thailand and much beyond.
We live in an integrated world . Events in far of countries affect the quality of our air , our summers and winters.
Our stock markets have a lot in common with the weather.
Integrated , unpredictable , whimsical !
And then we have human emotions , and crowd psychology to add more uncertainty to the financial markets.
I have to step out from home . So do I take my umbrella?
Thus even after all the uncertainties and difficulties I have ' to take a call' on today's weather .
Yesterday Indian equity started in the green but drifted down . Its looks like market is tired and will remain sideways with a downward bias. Its best to remain stock specific when the market lacks in direction like this.
IT stocks like Wipro can be accumulated on declines . Indian IT sector looks close to an inflection point . Where to find the next Alibaba?
Also look at supply chain companies like Gati and Bluedart .
We have been all along bearish on INR for the medium term and remain so for now.
After the FED delay on raising interest rates , not its the turn of ECB to give fresh stimulus. European markets moved up sharply buoyed by these hopes . Asian markets will also follow the lead for today .
On the back for EU easing USD to show further strength going forward . The next big news will be from China . Will the Chinese government allow growth to slow down and facilitate structural adjustments or will it try to improve liquidity and push up growth ?
Indian markets are expected to open in the green taking the lead from other Asian Markets.
INR looks weak for now.
We have seen some bounce back in commodity stocks. This was mainly due to the following reasons :
1) Fed delaying the increase in interest rates
2) Short covering on commodity stocks
3) Bottom fishing by investors
4)China GDP numbers come a shade better than expected
However this looks like a perfect value trap for the investors . To start with the Risk On sentiments because of the Fed inaction will not last beyond Q1. More than 80 pct of market participates believe that Fed will have to raise interest rates latest by March 2016 . The continuing inaction by Fed is eroding market confidence in US recovery and Fed's firmness to act.
China's GDP has to be taken with a pinch of salt. Also it confirms continued softening in Chinese economy . Will China fall into a recession ?
In any case its best to buy commodity stocks near the peak as the slump in commodities may continue for sometime.
Thus good time to book profits and move into sectors that are less dependent on China. IT stocks like Infosys , Wipro looks good for the long term investors.
The growth numbers from China came a shade better than expected . However they only confirm the slowing in this growth engine . Commodities lead by Oil sold off .
Asian markets looks lackluster. However as the market could not move up when the numbers from China was better than the expectation it shows the overall downward bias .
INR remains range bound however we expect the breakout as and when it happens to be on the downward side .
China big data the third quarter gross domestic product (GDP) report is which will be published today will set the tone for the markets.
In the last few weeks we have seen the market swinging between
1) Bad news from China
2) Inaction from Fed due to bad news from China
While all of us will like to know the exact situation in China , the margin of error is far more than for any other market . Thus as China slows down the possibility of knee jerk reactions from the market will continue.
This in turn will also decide how low can the commodity prices go . The domino effect of the low commodity prices are already apparent in commodity led economies like Brazil, Russia,Indonesia, Australia and now the MEA economies .
The auto sales numbers for EU do not show any major impact on the sales of new and second hand cars for VW. So far there has been only a minor dent in the sales prices of the second hand cars .For the full month, Volkswagen’s new passenger-car registrations, a proxy for sales, rose 8.4% in the European Union, slightly below the 9.8% advance for the market as a whole, according to data by the European Automobile Manufacturers’ Association, or ACEA. Thus VW continues to benefit from the overall recovery in EU and revival of market sentiments. Consumers don’t connect Audi to the VW group so Audi sales have not been affected in EU. However these are early numbers and the actual impact on the goodwill of the company can only be estimated in the long term.
Earlier this week, the weekly German magazine Der Spiegel reported that "at least 30 people" were involved in the deception. Thus as the investigation proceeds we may expect more senior level changes in the company .
VW AG’s was forced to lower earnings estimates, take a $7.4 billion charge and change of CEO. However as per some analysts the costs can go up to $ 38 billion. We can expect more write offs as the actual cost of the scandal hits the company . The actual cost of this scandal will be a function of the following factors :
Will Volkswagen be able to survive in its present form ?
VW is a company with solid fundamentals and history . They should be able to withstand this crisis. However much will depend on how transparent the management is with the customers. We may also see the sell off of some of the unaffected brands like Audi to circle them out from the crisis and protect their brand value. This will also be prudent for the health of their financials . We will keep you posted as the saga unfolds.
US inflation has come low in line with the market expectations. The probability of the US interest rate rise have being going down and now looks remote .
Markets are moving up in line with the increased expectation of continued low interest rates .
Bad news from China >>> Market goes down >>> FED inaction due to slow growth in China and concern about Global growth >>>> So risk is on and market goes up.
We have been in this cycle for some time now , where bad news is good news in the short term.
In India Tata Motors look good for the short term . Buy with close stop losses.
Oil continues its downward journey after a short break . Other bulk commodities also looks set to continue with their downward journey. US and EU equity markets also sold off . Asian markets looks set to soften further , in absence of any positive news from China or Fed.
As the quarterly results pour in the action in the Indian market will be more stock specific. We can expect increased volatility in these counters.
For NIFTY it looks week in the near term. INR remains range bound. In the medium term INR may weaken in line with the sell off in the Emerging Markets.
Our yesterdays strategy of long Infosys and short TCS did well . We will keep suggesting such short term trading strategies . However they are to be implemented with a strict stop loss and closed out at the end of the day.
We are also starting a section on technical analysis where we will discuss such money making opportunities regularly. Please register for the same.
If you want us to analyse any specific stock please write to us and we will analyse the same for you.
What are the things you will like us to cover to make the Morning Tea more healthy for you ?
We live in a global village , no where else it is so apparent as the financial markets .
China's dollar-denominated imports fell 20.4 % in September , this is 11 consecutive month of decline. Exports fell 3.7 % from a year earlier.
This lead to a sell off across markets . With more such negative news coming from China , we can expect further sell off in risk assets.
Indian equity market came off in line with the other emerging markets. Infosys results was better than expected , however their CFO resigned which dampened the mood on that counter. TCS results has been muted and has misses expectations .
A trading idea for the medium term : Short TCS and Long Infosys . As the PE gap closes between the two companies this combination can make money .
In the short term we can expect a sell off in IT counters with a few exceptions.
The growth figures from India that came out yesterday have come better than estimates . The core sectors are showing signs of revival . As the advantages of lower interest rates gets passed on we are expecting growth to pick up .
Thought the inflation numbers have moved higher , this is more to do with one off factors and may not be a cause for worry at this point.
Thus Indian equity market may try to move up .
The cause for concern is the data that will come from China . Please refer to our yesterdays report for the timeline of date expected this week.
In case China falters again we can expect global sell off and Indian equity market will be no exception . We are already seeing continued bearishness in real estate markets across markets due to the global growth concerns and oversupply situation.
This week the market will be grappling with data overload . We will have very important data coming out of India, Japan and China. There are also policy announcements from the central banks of Indonesia and South Korea.
The timeline of data from China are as follows :
While the market expectations are low from China , any further signs of deterioration can dampen the sentiment of the market. On the other hand the slightest hint of bottoming out will be welcomed by the market.
Japan will publish consumer confidence data for September, which are expected to reflect the waning sentiment amid mounting concerns around the country's economic outlook.
For India September trade, consumer inflation and August industrial production data due are due on Monday and September wholesale inflation on Wednesday.
Infosys the bellwether of Indian IT industry will announce its second quarter results today . After the recent slew of good results the market expectations are high from the company . This will also set the tone for the overall Indian equity market in general and IT companies in particular. Infosys has been able to successfully transform itself under the current leadership into a more agile and customer focussed company . Going forward we expect the PE gap between TCS and Infosys to further narrow down .
The US Fed as expected has not raised interest rates. The important takeaways from this meeting are as follows :
The above diagram shows the dependence of the world economy on China.
As it is very clear from this diagram China is one of the most important growth engines of World . Any demand destruction in China will have massive ripple effects across the globe. No wonder with the slowdown in China the world commodity prices fell like a stone .
The world will keep a close watch on China and every piece of data that emerges from this country. As the sentiments turn extremely negative at some point we will have ‘ better than expected data ‘ that will allow the market to bounce back . This is what we saw in the recent past when commodity companies like Glencore , Hindalco ( India Aluminium co ), Vedanta tried to move up. These bounces are also supported by short covering .
However one has be clear in their mind that these are trading calls and not necessary investment calls . The fundamentals still remain extremely weak for commodities and more so for commodity related companies.
Point to be noted is that most of the major global commodity companies have gone for global expansions when commodity prices were much higher . Thus there are assets on their books that have impaired .
Also most of the expansion was backed by low cost credit . Thus we have the dangerous combination of assets that are much below their book value and high debt whose cost is set to go up .
This problem will not be restricted to commodity companies alone . Recently we have seen Deutsche Bank Q3 losses that have taken the market by surprise.
“An impairment of the carrying value of Deutsche Bank's 19.99% stake in Hua Xia Bank Co. Ltd. of approximately EUR 0.6 billion. This reflects an updated valuation triggered by a change of the intent of the holding as Deutsche Bank no longer considers this stake to be strategic. “
A quote from Deutsche Bank's review of Q3 results .
As we see companies / banks exposed to China in particular and commodity prices in general are the next in line for selloffs. In India we have seen companies like Tata Motors selling off due to this . Going forward we have to look deeper into the balance sheet of the banks for possible write offs that are yet to be factored in.
However for today bad news is good news and Asian markets may cheer continuation of low global interest rates .
Indian equity market may try to move higher backed by rebond other Asian Markets. However the rebound may not sustain . It may be a good idea to covers shorts , unless us see a clear direction emerging .
In the medium term the market will keep an eye on policy action by the Indian Government . The RBI has done its part to spur growth . Now is the turn for the Government to push through reforms . GST and Land reforms can make or break the market .
Also we will be watching the pre polls in Bihar closely .
Rupee has been moving sideways ( 55 to 56.40 ) for sometime now. Our guess is the breakout as and when it happens will be on the downside.
US markets moved up , supported by oversold sectors like biotech and Oil . Indian commodity companies like Hindalco also moved up supported by bottom fishing.
As mentioned in our yesterdays reports we were expecting commodity led companies to move up as they looked oversold .
However for long term investors , commodities will remain in bearish trend for some time to come . Thus this up moves can be used as opportunities to move out and re-calibrate the portfolio. Rupee have shown some strength , however it may give up all the gains and drift towards 66 in a few days time. Importers can book part of their dollar requirement at current levels to hedge their risk.
Risk is on onces again. With slowing down of US job growth , and global concerns about the growth of china increasing , its unlikely that the Fed will raise interest rates this year.
The markets celebrated this 'good' news and moved up.
The Indian central bank has also started reducing interest rates to spur growth . With lower oil price and consequent lower inflation there will further room for RBI to reduce interest rates in future.
This upswing gives us an excellent opportunity to reshuffle our portfolio and move to quality stocks .
If you have any specific enquiry about any stock , write to us and we will analyze the same in our stock market update . What are your thoughts on this upmove ? Will this rally continue ?
US Job data came lower than expected. Employers added a modest 142,000 jobs in September, while gains in July and August were revised down by a combined 59,000 positions, the Labor Department said Friday. The job creation was enough to keep unemployment at a seven-year low of 5.1%.
However the jobs being created are of a lower quality . Also the new jobs that are being created are of a lower quality as compared to the jobs being lost . We have less well paying jobs in the Oil and mining sectors and more jobs in Restaurants . The days of definite retirement benefits are vanishing fast .
But then for most of the market which has got used to reacting to only the short term outlook , this is good news . Remember we are in the period when some the bad news from US job markets is actually good news for the stock markets.
Bad US jobs data implies that the FED has one more excuse to delay the rise in interest rate . So the markets rejoice at the continuation of easy money .
However the evils of easy money is all around us . Let's take a look at Glencore for instance. Gencore being one of the biggest commodity houses and one of the highest leveraged players .epitomizes the evils of easy money .
As the Fed pushed in additional liquidity into the system, Banks took advantage of the low costs and started giving easy credit to weak players . Commodity prices moved up buoyed more by liquidity than by demand growth . In turn mining and other commodity assets prices reached astronomical levels. Now that all the commodity asset prices are falling all the balance sheet of the commodity houses looks highly inflated .
So the list goes on and on : Glencore is just the bellwether of things to come !!
In India the commodity companies like Vedanta group , Cain , Hindalco , Tata Steel has gone in for expensive acquisitions backed by low cost of credit . As the credit costs goes up and assets prices fall for many of them the damage to the balance sheet is yet to be priced in.
Markets looks lackluster and is looking for fresh triggers . Asian Equity markets may lose steam after the recent upmove . Indian markets also failed to make any breakout . The recent strength in INR may not continue. INR is expected to weaken again to previous levels.
Markets may move up buoyed by the better than expected numbers from China : China's factory PMI has come at 49.8 above estimates and that of August's 49.7
The data from China is better than expected . Though it will be too early to celebrate , it should reassure the markets that all's not lost . China will continue to grow albet at a slower pace .
Also date from the Government of China will be taken with a pinch of salt . US markets recovered from their lows . Glencore shares recovered backed on the company's assurance .However the bigger concern remains on the balance sheet strength of Gencore in particular and mining companies in general .
However for now the market will be in celebration mode . In India with the interest rate cut and good international news the markets will continue its upward journey.
Some of the stocks that may provide value are : Tata Motors , Maruti, and L&T
The following news will decide the market direction for this week :
Overall sentiments will remain bearish with the slowdown in China becoming more severe.
(Higher volatility is the new normal in this market . The Indian markets as expected was deeply in red before the RBI announcement .
However the positive surprise from RBI boosted up the sentiments and the market moved up with confidence . Along with the other Asian markets Indian markets may also continue to recover till Friday .
Friday we have the official PMI coming from China , any further slowing can again change market sentiments and consequently the market direction.
We have written this in one of your previous posts :
One of my close relatives is a 'trader' in equity market . He purchases good stocks , then sells them off as they go up by 15 - 20 % and purchases other stocks. I think its a good strategy . However the day the market corrects 20 % he freezes into inaction. He becomes a long term investor . So you see the problem .
As disciplined investors / traders we have to understand the difference. Going forward we will have two separate sections for investors and traders. For Investors we will have multibagger ideas which will be reviewed from time to time .
However for traders they need to monitor their positions very closely based on new news flows , volume data , investors sentiments , volatility levels and specific stock based information. We plan to start a section for technical analysis . However day trading are not for the faint hearted and on a bad day one can lose a lot . What is your attitude towards losses ? Do looses puts you in a state of inaction and denial ? Do you keep averaging in a falling market ? Like my relative do you become a long term investor from trader when the market falls ?
Will you like to share your experience with us . Ask me anything and I will revert .