Matrix: Reloaded

Author : Anky, the 'Sabu' guy.

Now that we are well versed with various asset classes. Lets look at strategies, inter-linkages between various asset classes and how they react on various measures.

So we know when CB(central bank) cuts rates or does easing, risk assets rally. Also, the local currency depreciates. Look at it this way, when CB cuts rate they are basically increasing the money flow in the market. So more INR coming into market means, value of INR should depreciate in short-term(in medium term it may balance again as the demand may increase to cater to the increased supply)

So, lets understand what does weaker currency mean for an economy. The obvious bit here is exporters will benefit ( because they get paid in foreign curncy and thus would get more on simple value terms). E.g. You started exporting weed at $10 for 100grams when 1$=40INR. Now INR weakens due to RBI rate cut and 1$=50INR. So, now for the same 100 grams of weed and at same price like before you would be earning more,10INR more.

So their lies your first strategy too. Lets assume everyday at the end a stock is fairly valued(that means its trading at the price where it fundamentally should). And then RBI cuts rate then exporters will benefit more and should rally or outperform(**again make sure you actively track these events, because most of the times these cuts, etc are priced in early by the market. So by the time the actual rate cut happens exporters had already rallied**)

So any export driven equity name does well during INR weakening. And thus you find IT companies doing well when INR weakened( IT companies clients pay them in foreign currency, so the currency conversion helps them). And this is also the reason why recently you had IT names falling because INR strengthened.

Now you also have geographical exposure for various companies. And any positive development in that region helps those companies. So when you had Japan doing heavy quantitative easing( kinda like easing but here instead of rate cuts, the govt buys securities in the market to infuse cash) Suzuki did well and which indirectly helped Maruti as well and the stock rallied. Its these subtle things that if you are aware of or atleast know about then you can google out and find results and your desired stock to buy ahead of markets.

Another example would be impact from commodities. Now, being a major importer India and a lot of its companies use various commodities which are imported. One bad weather (where the crops are imported from) and if the crops are affected, their prices go higher and that would increase your input costs and thus lower your margins and hence the profitability ( recall equity means you are owner, so something bad and you would also suffer)

So to sum it up: Easing by CB implies INR weaker implies Exporter stocks should rally

Also, Positive development in your geographical region implies your stock will rally

And lastly, Bad weather raises agri or commodity prices implying higher input costs implies lower margins implies lower profitability and thus Equity sells off

Thats why I call it.. Its all interlinked.. One action affects various others in smway or the other.

Word of caution here: The strategies above are all fundamentally true. What you as an investor need to gauge is predict things that are likely to happen in future ( via reading articles, etc and your own learning). At no point these wikl give you assured returns, as I said you need to track stocks well and read about them to understand the price movements and what all factors are priced in. Trust me have patience, market will give you enough opportunities even based on the above 3 strategies to trade well, but choose stocks after reading well about it. Nobody controls the market, but atleast be informed where you are investing.

Financial World... The Matrix.. Or is it??

Author : Anky, the 'Sabu' guy.


No you are not the ONE.. Neither am I .. But here i draw parallelism with matrix because these markets are truly fascinating and inter-linked. And yes the first bit of exploration journey will reveal so much within these markets that you will ask yourself did this world always existed around you or were you asleep.

Lets get down to core points and focus on few assets and inter-linkage of various markets. Also, how actions by central bankers or policy makers impact these assets and markets overall.

Equity: Its simply money raised by company by giving you ownership. If your country, industry or exclusively your company does well then you are bound to make profits. With ownership comes consequences as well like if your company isnt doing well then you would suffer and loose value. Remember this core principle rest of finance and how to analyze shares comes later. Some terms we will look at later editions are Price by earning ratio, leverage ratio, etc.

Bond: Its capital raised by company or govt and in return they agree to pay you annual ( or could be semi-annual) coupon along with repayment of total capital (yeah just lik Loans, but these are tradeable). Yield is the total return expected from the bond. Its calculated incorporating annual coupon and capital repayment at the end.. More such details later

Equities are the more riskier assets and thus have higher returns but can also result in higher losses. Bonds are less risky assets and thus offer less returns. You would be wondering whats the risk in bond. The risk is if the company or govt whose bond you have bought fails to pay you coupon or capital repayment. So you have rating agencies which rate these corporates and govt sovereign rating to give you an idea as to what is the probability that they will repay.

Now lets put some practical case and see how various assets react to it. Today, when central bank cut rates (repo rate or refi rate) they are basically cutting the rate at which they lend money to banks (commercial banks). So in real life if you get loans at lesser rate you would be encouraged to borrow money, similarly is this case commercial banks would borrow more from central bank and thus infusing more money into the markets

Banks then, ideally should, lend out this money to customers and corporates at higher than repo rate and make money. So this leads to more loans, more business projects, more growth, more jobs and more purchasing power.

Now the simple theory is that if you know well ahead that RBI will cut rates then you can go and buy risk assets like equities  becoz this inflow of new cash in the system would spur the businesess and help profitability

Why does RBI cut rates? In order to spur growth. The fear is with rate cut and money infusion into the system its likely to increase inflation and which is bad for economy. So any central bank has to watch mix factors like inflation, growth and unemployment to come to a decision to cut or not.

So can RBI hike rates? Yes. It does that to remove money floating in the system to reduce inflation.