Dear Advisory Client,
At the outset, we wish all are clients and followers a Very Happy Diwali and a Great Year Ahead.
Business and economic conditions have worsened over the last few months. Our results tracker for the 2nd quarter FY20 results suggest weakening business sentiments with muted guidance from most of the companies declaring results. Over and above this, credit market conditions are extremely poor with markets virtually frozen for most except a few issuers. Credit spreads have ballooned to alarming heights and this is affecting borrowers as well as lenders, a virtuous self fulfilling cycle that caused the 2008 global credit crisis. Click here for our results tracker.
On the global front, US corporates are throwing mixed results, with Apple & Microsoft showing promising numbers while Google & Amazon are cautious. Economic data is weak across the globe led by China.
In all these factors, equity indices are rallying with S&P 500 hitting record highs and Sensex, Nifty at close to record highs. Hopes of a US-China trade deal, Brexit, and more tax cuts in India are driving the indices. Interest rates are at lows with central banks cutting rates on weak economic data, which sounds like an oxymoron, as weak economic data and low rates and inflation are signs of depression rather than higher economic activity.
Looking at the valuations and growth prospects, it is becoming increasingly difficult to pinpoint stocks to hold in portfolios, even though through the years we have identified some of the top performing stocks that have generated high portfolio outperformance. The lack of demand, both consumption and investment is hurting all companies irrespective of their fundamental strength. However, the markets may move against any logical reasoning for longer periods of time and this may continue to flummox investors.
In such an environment, index investing is a good option as market upsides are captured while in downsides, indices fall less than individual stocks and can be used to enter stocks at lower valuations at the appropriate time.
Index ETFs are the best index investing option as they are low costs and highly liquid.