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A Bank of America survey shows cash levels with fund managers are at the lowest since March 2013, allocation to equities is at its second highest level ever since the survey started and emerging markets continue to be the investor favourites

February 20, 2021 / 02:57 PM IST

Dear Reader,

Bank of America’s survey of global fund managers this month shows just how bullish investors are. The survey showed cash levels with fund managers are now at the lowest since March 2013, allocation to equities is at its second highest level ever since the survey started and emerging markets continue to be the favourite, although allocation to them dropped a bit from January.

Such low levels of cash were last seen just before the taper tantrum in 2013, when Fed chairman Ben Bernanke said he would soon start to taper quantitative easing. US bond yields surged in response, at the mere possibility of Fed support being withdrawn.

Does it have any parallels with the rise in US bond yields now? Not really---Fed chair Powell has been at pains to coo like a turtle dove to the markets.  But US 10-year Treasury yields have risen to 1.3 percent, Japan’s to 0.1 percent, Germany’s to -0.32%. That may not seem much, but for those worried sick about a bubble every little thing looks like a pin. This FT piece quotes Deepak Puri, chief investment officer for the Americas at Deutsche Bank Wealth Management, who thinks the yield on the 10-year Treasury should be “at least above 1.75 percent to start really making a dent in the equity market’s structural argument that it’s the best place to be”.

The immediate reason for higher yields is Treasury Secretary Janet Yellen’s push for a bigger stimulus. As this FT story points out, the big stimulus will have equally big consequences.

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Fears of a huge government borrowing programme have spooked the Indian bond markets too and the Reserve Bank of India is having a hard time keeping yields down, seen from the failure of recent bond auctions. Under these trying circumstances, the best strategy for a bond investor, says R Sivakumar, head of fixed income at Axis AMC, is to be invested in low duration bonds. While December quarter corporate earnings have provided a justification for the equity rally, higher bond yields could cap market valuations.

The Indian economy continues to improve, as our latest weekly recovery tracker shows. Investors could ride the recovery on Ashok Leyland, whose volumes improved in the December quarter. HEG, which makes graphite electrodes, is a play on the recovery in the steel industry. The government’s infrastructure push will benefit the construction sector, including firms such as Va Tech Wabag. Increased construction activities will increase the demand for cement. Coal demand has started to stabilise. Capex continues in the food processing sector, justifying the steep run up in Axtel Industries.

During the week, we looked at growth opportunities across the board starting from companies in the consumer durables business to firms setting up power projects to auto ancillary companies such as Bharat Forge and Motherson Sumi. We asked which life insurance stocks investors should bet on. We considered what would be the best way to play a revival in the hospitality industry. And we thought deeply about which footwear stocks would benefit the most as the nation gets back on its feet.

Will the recovery mean a shift away from the tried and tested FMCG favourites? That has already happened, as is seen from ITC’s woes. On the other hand, the Nestle India stock should continue to find takers. There is though a worm in the bud that could mar the rosy outlook, as is brought out by this analysis of the FMCG rebound story.

Nevertheless, the Indian recovery also has a structural component to it, because of the government taking the opportunity to push through root-and-branch reform. The Performance-linked Incentive (PLI) scheme to boost domestic manufacturing, for example, has led to Apple planning an iPad assembly plant in India, according to a Reuters story. The PLI scheme has now been extended to telecom equipment. Prime Minister Modi has said that natural gas will be brought under GST, which will not only lower energy costs but also spells new investment opportunities. All this has led to a rush of funds into India, pushing up the rupee close to a one year high.

Globally, the Flash Composite Purchasing Managers Indices (PMI) for the current month, available for the major developed economies, show that while the economies of the Eurozone, UK and Japan continue to shrink a bit in February, their rate of contraction is not high, which means that although the fresh lockdowns in some parts have had an impact, it’s nowhere near what happened last year. The availability of the vaccine is keeping spirits up, in spite of the EU botching up its vaccination drive. Best of all, the US Flash Composite PMI is at a 71-month high, an indication of the strength of the recovery there.

The prospect of an imminent recovery has fired up commodities, with copper prices matching the highest point reached during 2007-08. Some have started to talk of a new commodity super cycle, advising investors to diversify into commodities. Add to that the severe winter in the northern countries, which has exposed energy vulnerability across the globe and it is no wonder that talk of inflation is in the air. The US Flash PMI shows momentum on prices reaching record highs.

Bank of America has said we are seeing the ‘mother-of-all asset bubbles’. We too said the new fund offer rush is a sign of market frenzy. On the other hand, the huge fiscal and monetary stimulus by governments will have powerful effects and this piece argues that global markets may well go down the Japanese road, which saw real estate and equity prices more than double between 1985 and 1990.

While cautious domestic investors in India have been taking money off the table, US retail traders have boldly gone where no one has dared to go before, ramping up penny stock volumes to new highs. One sign of the frenzy in the US is the craze for Special Purpose Acquisition Companies (SPACs), which are blank cheque shell companies formed for the express purpose of gathering capital through an IPO to acquire an existing company---SPACs have raised a massive USD 39 billion so far this year.

The euphoria has led to rap artist Cassius Cuvee releasing a music video on YouTube about investing in SPACs. Called ‘SPAC Dream’, Cuvee’s introduces the song thus: ‘It's ya boy Cassius Cuvée, you know I gotta give a shoutout to everybody in the SPAC game helpin’ me eat good these days, man it's crazy’. He goes on to sing, among other things, this memorable line, ‘Let's get rich, stocks only goin’ up, never shrinkin'/Suits hate on Dave Portnoy but he say what we thinking.’ Dave Portnoy is a famous internet celebrity and poster child of the day trading frenzy, who livestreams his trades on Twitter.

The song ends with the lines, “See me chasin' paper, I'm a money maker/
Hey, hey, money maker/
Money maker/

Money maker.”

I’ll leave you to decide whether it’s irrational exuberance that has led to this musical outburst.

Cheers,

Manas Chakravarty
Manas Chakravarty

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