Outlook for Markets - Mar 2019

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First, the US Markets - World Drivers (S&P500)

Fundamentals / Valuations:

  1. S&P500 ~ 2800. Trading at trailing 12-month (TTM) PE Multiple of 18x annual earnings, having an effective Earnings Yield of ~ (1/18=) 5.5%. Compared to US 10Year Bond Yields ~ 2.5% (nearly half-of the market's Earning Yield). Bullish for stocks. 

Technicals / Charts:

  1. Likewise technicals are also indicating a potential recovery on the charts (after Dec 2018 volatility). Spot (2800) has recovered the important & bullish Moving Average ("green line"), and is also above the support band of 2600 - 2620.
  2. Sustained breakout above 2800 levels could take S&P500 to the next targets of 3200 - 3300 (+15%) in 1-1.5 years. On downside, we expect 2600 - 2620 to hold if it goes there. (More details in the Monthly Update, listed on the website)
  3. In the chart below for SPY ETF, you can see an example of the Moving Averages (MVAGs), which are also called 'Momentum Indicators'. They quickly help us in identifying the mood of the markets, and also the high & low points very quickly. Details of the these MVAGs, and how to locate these charts, can be found in the first paid video, Video 0 - Parts 7 & 8.

US Outlook: 

  1. Taking a positive view of the investment, S&P500 ETF could generate an upside of ~ 15% in 1-1.5 years, more so after a 1-year consolidation in 2018. 
  2. Exotic-ETF on S&P500 - Can generate an upside of +60-70% (downside depends on S&P500). See Blog#3 on Exotic-ETFs.

INDIA NIFTY (~ 11,450):

  1. Positive bias on the NIFTY - along-with S&P500 breakout. Next targets 12,500 - 13,000 (+10-13%).
  2. Following the FED Hike Pause (in Mar) - RBI may cut rates in next meetings (boosting the NIFTY, & partially discounted). 
  3. General Elections 2019 - Base case is that the current Gov't is re-elected (maybe with a coalition). If not, expect some 'temporary' volatility. Further, if NIFTY tanks on any US panic, add to positions around important support levels of 9,900 - 10,100 (More details in the Monthly Update, listed on the website).


What is ETF Investing ??

ETFs (Exchange Traded Funds) are nothing but a diversified basket of stocks, which are passively managed (fixed composition), and where NO FUND MANAGER tinkers with the positions, or trades in & out of positions. 

ETF Types: These can be sector based, like Auto, FMCG, Banking, Pharma, Energy etc., or could be Market Cap based, like Top 50, Top 100, Next 50 and so on. Categorizing them by Market Cap defines your risk/reward profile, like an ETF based on the Top 50 market cap companies, could be safer vs. the Next 50, and the more you go down towards Mid-Caps & Smaller Caps. And within the Top 50 region, there could be literally 100s of Mutual Funds (having little bit of variations), but only 1 ETF (like India's NIFTY or NIFTY50), and their risk / reward profiles will be similar.

vs. Mutual Funds: It has been observed historically that Mutual Fund managers, using too much discretion vs. the markets, tend to lag behind their benchmarks. For these reasons, ETF investing has become quite popular in the US markets, with ETF's AUM crossing $4Tn (vs. the size of US GDP at $20Tn), and are incrementally becoming popular in the rest of world markets as well. 

  1. https://www.cnbc.com/2017/08/07/etfs-are-taking-over-the-world-and-theres-nothing-anyone-can-do.html
  2. https://www.fool.com/investing/2017/02/26/warren-buffett-just-revealed-the-best-investment-m.aspx
  3. https://economictimes.indiatimes.com/mf/mf-news/index-investing-takes-total-aum-of-etfs-to-rs-1-lakh-crore/articleshow/67359826.cms

Fees: Mutual Funds can charge fees totaling 2 - 3% of the investment (upfront), sometimes also called Total Expense Ratios (TER), and these can add up to a lot over the long runs, or for big investments. On the other hand, passive ETFs typically charge 0.1% fee (NEGLIGIBLE), both in the US & Indian markets. 

For a quick perspective: 

Investing Rs. 3Lakhs in a MF for 20Years (= Rs. 60Lakhs) can incur fees of Rs.1,20,000 ... vs. only Rs. 6,000 in a low cost ETF.

  1. https://economictimes.indiatimes.com/wealth/invest/are-mutual-funds-ter-charges-for-investors-too-high/articleshow/65448113.cms
  2. https://economictimes.indiatimes.com/wealth/invest/forget-direct-plans-these-etfs-charge-only-0-05-per-cent/articleshow/53075935.cms

Smart Products: Further, there are really no smart products available in the Mutual Funds. You just hope for the Fund Manager's discretion to generate a little out-performance vs. the markets (ETFs), which some years can happen, & some year may not happen, depending on a lot of factors beyond their control. And other than that there are really no smart products available. Whereas in the ETF world, there are ABSOLUTELY very very smart products available, like the Leveraged-ETFs or the Inverse-ETFs, which can multiply EXPONENTIALLY in the long runs, just as designed. For example, if the base ETF multiplies 2x in 5-7 years, a 3x-Leveraged ETF on that would mulitply 8x in that time. Further, if the base ETF multiplies 3x in 10-15 years, a 3x-Leveraged ETF can multiply 27x. These numbers are NOT ASSUMPTIONS, and we have actual proof of concepts during the long bull run of 2009-2018, where some of the base ETFs have multiplied 3 - 4x in 9 years. Refer to Blog#3 (Exotic-ETFs) or the paid Content Videos more details. 

  1. https://www.fool.com/knowledge-center/what-is-a-leveraged-etf.aspx