NEW NORMAL AND EMERGENCE OF CURRENCY AS AN ASSET CLASS
Let me borrow the famous phrase from legendary Bond investor, Bill Gross, "The New Normal". Bill gross describes "new normal" as a period of time where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the deleveraging and re-regulating of the global economy, which in turn should substantially inhibit the "gorging" of goods and services that we grew used to in decades past…
Thanks to the new normal, Indian equity investor and trader find himself in an era of choppy and listless market conditions. There are a number of factors that are contributing to it:
q Mr. Market and law of average
Markets adhere to the law of average fantastically. A decade of extraordinary returns is averaged out by a half a decade of under performance or a decade of choppy market. Take the US equity markets; 1920's roaring bull market returns got average out in 30's and 40's.1950's bull market saw a decade of listless conditions from 1965 to 1975. Bull market of 1980-1999 saw the lost decade for US equity between 2000 and 2010.
Bull market of 1979-1992 saw Sensex gaining at 33% annualised for 13 years. However, a sub-par market condition of 1990's saw Sensex go nowhere. In the last bull market of 2002-2008, at an index level India clocked a compounded return of 45%, a brilliant feat by any metric. At same time, this stupendous growth in equity prices has also laid the seed for its upcoming underperformance. If history is a guide then at least half a decade of choppy markets is in store for Indian equity participants. We are already getting a taste of things to come, as intermittent sharp declines or rise is evened out by months of choppy sessions.
q When contrarian is the consensus, consensus becomes the contrarion
In last 4 years we have witnessed the wildest swings in asset classes. A super rise in equity and commodity prices of 2007, and a thumping bear market of 2008 and again a meteoric rise of 2009. This kind of amplitude within such a short time has created a unique psychological landscape.
Over and above that information technology has reduced information arbitrage in such a manner that previously successful contrarion signals are being rendered useless. Take for instance, the recent Hindenburg Omen calling for a crash in global equities. History says that every major crash in US stock market occurred after a Hindenburg Omen. However, the fact the every media and news tube is flashing it every moment, calls into question the validity of once potent indicator.
This unique psychological landscape is causing the sentiment indicators to swing from extreme fear to complacency and back to fear at a very quick interval. So after a decline of 10-12% in Indian equities, sentiment is becoming so bearish that market is quickly finding a floor. Same thing is happening on the way up, after a rise of 10% or so, market is going sideways for weeks. The confluence of this unique sentimental backdrop and efficient information flows should keep the equity market bracketed for an extended period of time.
q Global economy is between the traps of inflation and deflation
Structurally weak developed economies are being countered by strong developing nations. Talk of Chinese economy slowing significantly and it causing collateral damage to commodity exporting nations is not helping matters. Such a mixed bag of economic conditions will continue to provide enough ammo to bulls and bears to fight it out for a long time.
SAILING THROUGH THE WINDS OF CHANGE
In order to navigate this new investment landscape we have to prepare ourselves to change the way we trade, invest and allocate funds. One has to move away from macro-investment towards micro-investment. Parking your money in mutual funds or PMS or ETF would not offer you much of a return rather astute stock picking will bring home the goodies.
One has to make the shift from being a passive investor to an active market participant. This is also a time to build your capital in other asset classes or business areas and keep it intact, so that in the next bull market there is enough to ride on. There is strong temptation to squeeze out performances of the last decade but it's advisable not to fall in that trap.
Global financial system is going through a structural change. This transition has raised the levels of stress in the system. Stress originates from uncertainty and that reflects in the form of unprecedented volatility. The two asset classes which are going to be at the epicenter of this adjustment phase are Forex and Fixed Income.
The world has been through many such transition phases: some socio-political (end of cold war), economic (technological revolution of 90's) and some financial (the one we are seeing now). Each of these shifting paradigms created an information loop that flowed differently through global asset markets. End of cold war benefited the equity assets of the developing markets of Asia and Eastern Europe and also commodities through China. Technological revolution saw its impact on the equity markets of the developed world.
Foreign Exchange market being at the heart of global financial structure is going to face most of the winds of change. Though forex is the largest market in terms of volume traded ($4 trillion daily), but it acts primarily as an Intermediate market, getting influenced by other asset classes. In this decade we are going to see currency emerge as a new asset class.
What commodities became in 2000 or equities became after 1980, forex can achieve that in this decade. We are going a witness many FX Indices (like Parker Index), ETF, ETN, and managed funds being launched over this decade. This will bring the significant amount of funds from retail to super High Networth Individuals. Indian currency market is in the midst of big change, exchange traded products will gain more importance and we could see RBI increase the daily market duration from current 8 hours to 15-16 hours a day.
Unlike equity, commodity and fixed income, currency is market for pairs. When we buy EUR/USD or USD/INR, we are buying Euro and selling dollar or buying dollar and selling rupee, so a bull market in one is bear market for other. As a result swings keep happening all the time.
Regards,
Anindya Banerjee.
Anindya1979@gmail.com
+91-9930272451
Regards,
Anindya Banerjee.
+91-8017207053
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