Investor Psyche: Moot Point or Mute Point?

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Author: Kunal Damle

Lately with all the negativity; both economically and politically, it certainly is a very uncertain time to be investing in any asset class. Cash is indeed king. Rhetorically, should one look beyond all the white noise or should one be concerned by being inundated with every news flow and event that occurs?

With the advent of the information age, news flow has got a lot more faster and therefore more efficient. Twitter and/or other news wires available on our all our devices tend to sway investor moods with the news flow. But as an investor, one does need to look beyond all the white noise and differentiate between value traps and cash cows.

In India, the stock market this year has suddenly turned ugly with both the indices falling off the cliff and investor mood getting very jittery.

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Source: Bloomberg

Now, relatively speaking have things suddenly got a lot worse this year or were they just a lot better last year? The benefit of hindsight shows the true picture lies somewhere in the middle. So how does an investor look at it for their investments? With the benefit of experience, now I would say don’t focus on the headlines/sensationalism and look at the original story.. do you still want to be invested or not? Stay the course and stay invested, in time this will generate a decent return and bear fruition. Discipline always pays off as long as the company invested in is fundamentally strong.

At the end it would be wiser to focus on the fundamentals rather than focusing on the noise that surrounds the financial market place. Over the next few posts, I will emphasize on what it means to focus on the fundamentals.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

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Monte Carlo Simulation: Application to Financial Markets Part I

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Author: Tanya Rawat

The application to financial markets is arguably fairly straight forward.

Methodology:
Monte Carlo Simulation using Geometric Brownian Motion.
We define the path of the price in two parts: drift and volatility.

Drift is the most highly likelihood of expected return (constant) and volatility is the shock (stochastic).

Formula is:
Expected Future Return = Expected Return + Z (random Z value)*Volatility
Future price = Current price*Exponent(Expected Future Return)

We can make 3 assumptions about drift:
1. Risk neutral argument as used in the Black-Scholes model. Here we assume the returns will be the risk-free return
2. Random walk. Here we assume 0 returns as the past is not a precedence to the future
3. Efficient Market Hypothesis (EMH)

Output:
1. Take 10Y price history (if available or the maximum)
2. Find the return and volatility over the 10Y period
3. Find the 1D return and volatility from this sample
4. Run simulation 1000 times

The next post will discuss application to our markets with 1 month price forecasts with three scenarios viz. bull, base and bear case.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

Steepening Turkey 5Y USD CDS

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Source: Bloomberg

Push the tempo (Market Wrap- June 14th)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa
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Author: Tanya Rawat

“Push the tempo,
Push the tempo,
Push the tempo,
Push the tempo up,
It’s the tempo” rings out the lyrics from the FatBoy Slim 90’s classic Ya Mama.

Our region laments this very vibe as it patiently awaits Saudi Arabia market opening to foreign investors though I don’t expect any major change in momentum given we are approaching the holy month of Ramadan and this news has already been priced in since January 2015. Tadawul is up ~15% YTD. In the same vein, GCC markets are expected to have thin volumes on the lack of news and thin trading volumes during Ramadan (due to shorter trading sessions).

The catalyst of the week is the FOMC minutes and Eurozone ad nauseam discussions with Greece over its debt obligations.

In Turkey, I find this as an ideal level to enter into a long position with Grexit the only tail risk to be wary of as Europe is a major export destination. We are already seeing its effects with Turkey USD 5Y CDS at 1Y highs of 234 bps.

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Source: Bloomberg

Naira remained stable at 198/$ while the Rand is expected to lose ground as the Dollar continues to strengthen on the back of hawkish comments expected by Yellen this week. This is set to continue hurting the JALSH Index akin to other emerging market indices.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© http://www.keepcalm-o-matic.co.uk/p/keep-calm-and-push-the-tempo/

 

Going Cold Turkey?

Turkeys

Author: Tanya Rawat

Published in Global Risk Insights

İstanbul’u dinliyorum, gözlerim kapalı
Önce hafiften bir rüzgar esiyor;
Yavaş yavaş sallanıyor
Yapraklar, ağaçlarda;
Uzaklarda, çok uzaklarda,
Sucuların hiç durmayan çıngırakları
İstanbul’u dinliyorum, gözlerim kapalı.

These lines are from a beautiful poem by Orhan Veli Kanık which translates to:

I am listening to Istanbul, intent, my eyes closed;
At first there blows a gentle breeze
And the leaves on the trees
Softly flutter or sway;
Out there, far away,
The bells of water carriers incessantly ring;
I am listening to Istanbul, intent, my eyes closed…

The Black Sea on the North gently caresses Constantinople (present day Istanbul) via the Strait of Bosphorus, Aegean Sea kisses the shores of Smyrna (present day Izmir) on the West and the Mediterranean Sea bathes Antalya in the South. Geographically magnificent, people with genteel attitudes and gracious hearts, Turkey is an enigma.

My ideal kahvaltı (Turkish breakfast) is a plate of beyaz peynir, zeytin, sucuklu yumurta, butter, honey, sliced tomatoes, cucumber, some börek and Turkish tea. If this sounds rich to you, the history is doused with even more flavour and aroma, as one tries to flip through the pages of Byzantine and Ottomon Empires.

After the Ottoman’s faced defeat in World War I at the hands of Allied forces, a brave Turkish military officer who served during WWI led the Turkish War of Independence against Allied occupation and is credited with founding the Republic of Turkey. He was bestowed with the title Atatürk meaning ‘Father of the Turks’. He is Mustafa Kemal Atatürk who wanted a modern Turkey, wanted to embrace tolerance, wanted an open-minded society, wanted secularism. However, maybe he went a wee bit far and too swiftly in trying to change a country with deep Muslim roots by challenging its Muslim ideologies such as banning headscarves in public because he disdained a society prejudiced on the basis of what religion or practices one followed.

Subsequently, to his detriment, right-wing parties took advantage of this position and tried to exploit this during a rather tumultuous phase for Turkish politics during the 90s wherein Islam was ‘reborn’. The common Turks had enough though as the Lira depreciated alarming and inflation reached astronomical figures. The Turkish economy was hemorrhaging when a minnow emerged victorious in the 15th Turkish General Elections; the AK Party. It talked about European Union membership and it spoke moderately. Led by Recep Tayyip Erdoğan, it was indeed a watershed moment for Turkey. This was the paradigm shift it desperately needed. His era saw income per capita rise to $10,900 from $2,000 since the early 1980s, double digit inflation figures of 65% which plagued 80s and 90s fell off a cliff to ridiculously normal levels.
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Foreign exchange reserves excluding Gold grew from $4bn in the early 80s to $110bn. Government debt has fallen from 80% to ~35% of GDP. Structurally though, problems persist. While the Foreign Direct Investment remains constant at 1.5%, Current Account Deficit (% GDP) continues to dwindle downwards, averaging  -6%. The chronic low savings rate doesn’t help either; averaging 15% in the 21st century versus a world average of 23%. It has to rely on external funding of which short-term external debt (% reserves including Gold) is dangerously high at 98%. With an imminent interest rate hike by the Federal Reserves, Turkey remains vulnerable to hot-money outflows.

Erdoğan now needs to see the light of day. After taking up position as President of Turkey (a merely ceremonial position) post exhausting his term as Prime Minister in 2014, he had hoped AK Party to win the June Parliamentary elections 2015 to tweak the constitution enabling the President greater powers. He is a visionary, yet visionaries too sometimes lose their way. Here is man who by his mere beliefs changed Turkey and today post elections, he is faced with the prospect of going Cold Turkey (the term Cold Turkey implies abrupt and complete cessation of taking a drug to which one is addicted) on 13 years of unadulterated, absolute power. He needs to make peace with it.

Turkey needs less populist policies and more austerity, less interference in the functioning of the Central Bank thereby restoring its credibility in the financial markets and eyes of the investors, policies encouraging savings rate in a country whose demography is its strength (average age is 29 years old) and to preserve what Atatürk and Erdoğan dreamt of – a strong, educated and secular country whose strength is its calm yet resilient demeanour.

İstanbul’u dinliyorum, gözlerim kapalı..

References
Sharma, R. 2012, Breakout Nations, Penguin Group, London.

International Monetary Fund. Available from: <http://www.imf.org&gt;. [13 June 2015].

Trading Economics. Available from: <http://www.tradingeconomics.com/turkey/inflation-cpi&gt;. [13 June 2015].

World Bank. Available from: <http://www.worldbank.org&gt;. [13 June 2015].

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

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Oompa Loompa (Market Wrap- June 7th)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa

Oompa-Loompas

Author: Tanya Rawat

“Oompa, Loompa, doom-pa-dee-do,
I have a perfect puzzle for you,
Oompa, Loompa, doom-pa-dee-dee,
If you are wise, you’ll listen to me”

Remember this song from the Willy Wonka & the Chocolate Factory; a movie based on the book Charlie and the Chocolate Factory by Roald Dahl.

It’s loopy this week as our markets take cue from Sepp’s blatter (pun intended!), US NFP numbers positively exceeded market expectations, OPEC decided to keep oil production unchanged at 30 million barrels per day and the Turkish pre-election caused nausea last week.

As predicted, Dollar continued to strengthen with the Dollar Index (DXY Index) edging up to 96 levels and the US 10Y Tsy at 2.40 levels. Yesterday’s (June 7th 2015) Turkish election results showed the incumbent AKP losing the ability to form a single party government after 13 years and another party viz. HDP gaining more than 10% in the election and now set to be a credible opposition force if not forming their own coalition party. AKP will have to team up with MHP as the other parties viz. CHP and HDP are not keen in any association with AKP. Amidst this pantomime and US 10Y Tsy edging higher, we expect Borsa Istanbul to flounder vehemently this week as well as the Lira is bound to nosedive. Boo!

Like I have mentioned in the last few doodles, GCC markets are struggling to break past resistance levels, amidst thin volume and lack of news as we approach the holy month of Ramadan. DFM, Tadawul and Egypt opened lower at the start of the week while Qatar is expected to remain pressured till someone decides to play ball (pun intended again!).

Naira remained stable at 198/$ while the Rand lost ~2.83% with 5Y lows at 12.63/$. This is hurting the JALSH Index akin to other emerging market indices.

“Oompa, Loompa, doom-pa-dee-da
If you’re not greedy, you will go far
You will live in happiness too
Like the Oompa Loompa doom-pa-dee-do”

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

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Oil Volatility.. off a cliff!

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Source: Bloomberg

Part 1: Pradhan Mantri Jan Dhan Yojana

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Author: Kunal Damle

In continuance to the earlier posts on the achievements made by the Honourable Prime Minister Narendra Modi’s NDA Government the Flagship achievement has been the Pradhan Mantri Jan Dhan Yojana (PMJDY).

Launched with great fanfare in August 2014, the aim of the scheme is to ensure access to financial services viz. Banking / Savings and Deposit Account, Insurance, remittance, Credit and Pension (Source: www.pmjdy.gov.in). With majority of the Indian population illiterate and unable to access formal financial institutions, this was a step in the right direction.  The Government through this scheme has encouraged people to open accounts with public and private sector banks. One fear people have had in the past has been the Know Your Customer (KYC) documentation in addition to a fear of walking into the branch as most people in the lower income bracket find it difficult to converse with the bank staff. With the ease of getting an Aadhar Card (Source: https://eaadhaar.uidai.gov.in/) which is a Social Security Card, it also works as an Identity Card that can be utilized as a one document identity to open an account. The Government has had many camps in various cities to get people to get an Aadhar Card which has now become a one point ID Card for people at many Government offices and helps as a single KYC tool. The same can be utilized as a one document identity to open an account; one gets to open an account with no minimum balance, receives a RuPay Debt card and will also receive interest on Deposits made.

By walking the line and getting the account opened the citizen has now access to formal source of banking. One can access credit through the bank, rather than informal money lenders where one could get stuck in the vicious cycle of exorbitantly prohibitive terms of credit. Additionally the person would be able to keep money in the account rather than carry cash which encourages a non cash Society. When cash transactions are involved especially in India, these are from non-taxed income pool. As a society, by encouraging non cash transactions, the Government is pushing for a society to be part of the taxable pool thereby being able to track money velocity more accurately.

With the introduction of a direct payment of subsidy into the account, the Government has addressed a key issue of pilferage which has been a bane of many governments; many a middleman have made money of the amounts that should have gone to citizen but have been pilfered by middle man.  An example of the same was seen in UP (Source: http://timesofindia.indiatimes.com/india/UP-govt-patronising-corrupt-officials-in-MGNREGA-scam-Jairam-Ramesh/articleshow/22855890.cms)

However, this scheme is no one-way street with one seeing the benefits to banks as well, with low cost funding coming through the Current Account Savings Account (CASA). Public sector banks in India have been saddled with a large Non Performing Loans problem (Source: http://www.moneycontrol.com/news/economy/psbs-need-to-track-credit-better-to-check-npls-ex-sbi-cfo_1380539.html) and by raising CASA deposits, banks now have access to a cheap source of funding. By also providing insurance, lower income bracket citizens now have a chance to get life insurance coverage at a low cost.

With the above the Government has put the country on the right track for financial inclusion.

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

© http://www.pmjdy.gov.in/

Short Interest spikes in Turkey. Well…

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Source: Bloomberg

No Monkey Business (Market Wrap- May 31st)

Coverage: Saudi Arabia, Turkey, UAE, Egypt, Nigeria and South Africa 

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Author: Tanya Rawat

“Now I’m the king of the swingers, the jungle V.I.P,
I reached the top and had to stop” starts the beginning verse of the catchy Jungle Book track “I wan’na be like yo…” made immortal by Louis Prima.

In the same rambunctious flavour, expect the markets to show chutzpah this week with Turkey getting the party started with pre-partying already reaching crescendo in the latter end of May (USD terms); the Borsa Istanbul 100 Index lost ~9.30% as polls conducted by trusted agencies showed the AKP (viewed by many as pro-market) losing ground to opposition. Ahead of the June 7th elections, expect the downward slide to continue with Benchmark 2Y bond yields at close to 1Y highs at 9.85% and 5Y CDS at 220 bps. Additionally, Turkey equity markets have a strong negative correlation with the US 10Y Tsy yields which are creeping up to 1Y highs on strong economic data from the US.

The S&P looks stronger, the VIX at 13 levels, Dollar strengthening expected as US 10Y Tsy yields expected to rise further as the economic makeup improves in the US. Expect Gold to be flattish around $1200 per ounce till the June 5th deadline for Greece to make debt payments to IMF (a key catalyst).

As per my call last week, GCC markets broke first levels of support with the Dubai Financial Market (DFM) breaching the 4K level (AED terms), Saudi failing to continue its upward momentum. This week though markets look more resilient on Saudi opening mid-month via passive flows and I expect them to be range-bound with no major catalyst and Egypt to looking equally sedate.

While I expect Naira to fare in the median in the pool of African currencies, I expect the Rand to continue its slide on continued Dollar strengthening. This is hurting the JALSH Index akin to other emerging market indices.

“Ooh-bi-doo, I wan’na be like you
I want to walk like you, talk like you, too
You see it’s true, an ape like me
Can learn to be like you, too”

© 2012-2015 Tanya Rawat. By posting content to and from this blog, you agree to transfer copyright to blog owner.

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