S Naren, CIO – ICICI Prudential AMC, shares his outlook on the equity markets for 2016, the problems the markets are facing currently and explains why investing in the current bear phase will be rewarding for investors.
Notes: Just for the record, S Naren has been one of the few fund managers who has been very successful in getting broad market direction right. In Jan 2015 he called for investors to move into bonds and wait for markets to stabilize and earnings growth to come through. In Aug 2013, when Nifty was at 5150, he was of clear view that investors should buy Nifty or broad based mutual funds to benefit from upswing as valuations were crushed. That was also a very valuable assessment.
In this valuable video, George Soros shares his lifetime learnings on Financial Markets. Some of the key messages are:
1. In business cycles, Earnings (EPS) rise will lead Valuation(P/E) rise, and Earnings (EPS) fall will lead Valuation(P/E) fall because investors tend to extrapolate the present into the future.
2. Whatever is known to the majority, can not create profits (competitive advantage).
3. Markets discount all the known things. The profits are in the unknown (events of the future), which are not yet discounted by the market.
Japan was the top performing market of 2013, and China is the top performing market of 2014. The plunge in crude oil prices is likely to wreak economic havoc on vulnerable oil exporters such as Russia and Venezuela (both countries face recession in 2015), oil prices have hit 5 year lows this week, falling nearly 50 percent since mid-June 2014 as weak global demand for crude oil, combined with strong supply growth from new production wells going live in 2014. South and Southeast Asian markets also featured in the top-five performing markets after registering double-digit gains. Philippines and Indonesia equities followed close behind, both rising over 22 percent. Chinese market (Shanghai Composite) has bounced back after last couple of years of weak performance, and gained 52% in 2014, on the back of policy action by Chinese govt to boost the local economy, to become the best performing Asian market, and top performer worldwide for 2014 while beating Indian markets which gained 31% in 2014. Read More…
14% of the high yield bond market is from oil/energy producers, and that part is undergoing stress currently with the large correction in crude oil prices. Lower grade bond issuers with lower ratings are not going to be able to issue fresh bonds unless oil prices rebound. There are many highly leveraged oil/energy producers and service providers to the shale oil industry, and they are hit the hardest.