The Year-so-far in two charts:

With liquid funds being the best performing fund category, 2018 so far has been bad for portfolio returns.
A change of direction

November, however, has seen a reversal of these trends, at the time of writing this review.
Behind the trend reversals of both asset classes are two common factors:

• Weakening oil
• Stabilizing rupee

Will this new direction sustain?

Equity:  Brent Crude moving down to ~$66 from a peak of ~$87, and the INR closing Nov 13^th at 72.33 from a peak of 74.69 further reinforces our view for an upward consolidation to happen in the short-term. Whether the indices would regain the peaks made earlier this year is, of course, anybody’s guess, but the short-term trend, with stability in oil and currency would be upwards. This should be aided by a pick-up in earnings momentum, thanks partially to a weaker currency.
From our sample of 375 BSE 500 companies (of which 305 have declared Sep 2018 results so far), the latest market cap to trailing year earnings is at 22.8*, about 30% higher than the most attractive ratio of 17.5 in Sep 2013. So, there are still opportunities here in the broader market, beyond the high valuations of the mainline indices.

But this comfort has to also be squared with ground realities:

• Nifty and Nifty Midcap 100 valuations are high (above 25x and 47x respectively), and a fall in the indices will probably also result in a fall in broader markets, with attractive stocks becoming more attractive.
• The probability of growth in the US normalizing after the tax cuts of 2018, and a higher deficit putting pressure on the Fed and the USD,
• Elections at home

The above reasons remind us to stay cautious on equities, especially after the recent recovery.If the recovery sustains, we may recommend that you raise cash, and wait patiently for an opportunity to re-deploy. In the meantime, systematic investments (SIP and STP) are the way to add to equity exposure.

We ended last month’s review with a plea not to believe doomsday headlines. This month, we urge that headlines proclaiming “all’s well” be ignored equally.Reality lies in-between euphoria and despair.

Debt:  With CPI inflation below 4% for two successive months, infusion of liquidity through open-market operations (OMOs) from the central bank, and a refusal to hike interest rates to defend the rupee, debt funds have started to come into their own (a 0.5% jump in half a month is 12% a year, if sustained, just for illustration!).

Thanks to risk aversion after the ILFS default, net yields of our recommended AAA medium to short-term debt portfolios (gross yields less stated expenses) are around the 8.4% mark, and some stability in yields should be reflected in returns around these levels over the next three years.

We view the current debt market valuation as attractive and going forward, we will work on individual portfolios to increase the allocation to these short-term funds.With a recovery in dynamic bond funds, we will look to selectively pare some funds with lower credit profiles which have crossed the three-year mark.