Economic Recovery

Economic Recovery

Market economies experience ups and downs for several reasons.

 Economies can be impacted by all kinds of factors, including revolutions, financial crises, and global influences. Sometimes these shifts in markets can take on a pattern that can be thought of as a kind of wave or cycle, with distinct stages of an expansion or boom, a peak leading to some economic crisis, a recession, and a subsequent recovery.

🎯It is the process of reallocating resources and workers from failed businesses and investments to new jobs and uses after a recession. It follows after the recession and leads into a new expansionary business cycle phase.

🎯During a recovery, the economy undergoes a process of economic adaptation and adjustment to new conditions, including the factors that triggered the recession in the first place and the new policies and rules rolled out by governments and central banks in response to the recession.

*Indicators of Economic Recovery*

1. GDP is in consistent growth. 

2. Consumer sentiment and spending.

3. Manufacturing purchase managers index.

4. Unemployment and wage growth.

*Top 5 Stocks:*

▫️ Reliance Industries Ltd: 8.68%

▫️ HDFC Bank Ltd: 7.51%

▫️Infosys Ltd: 6.54%

▫️ICICI Bank Ltd: 6.5%

▫️Tata Consultancy Services Ltd :  4.44%

*Top 3 Underweight Sectors :*

▫️Financial services : _32.26% Vs. 36.2%_

▫️Energy : _13.78% Vs. 16.06%_

▫️IT : _12.32% Vs. 14.48%_

 

*Top 3 Overweight Sectors*:

▫️ Cement and Cement Products : 

      _4.11% Vs. 2.12%_

▫️ Construction : _4.02% Vs 2.7%_

▫️ Pharma : _3.66% Vs. 3.11%_

Corporate Bonds

*Corporate Bonds* 

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business.

When a bond issuer redeems a bond at maturity, you receive the face value of the bond and any interest that has accrued since the last time an interest payment was made. If the interest was not paid out periodically, you receive all of the interest that has accrued since the bond was issued.

Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds' maturity date. When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.

Benefits and Risks of Corporate Bonds

Corporate bonds, however, offer one of the best return prospects of any fixed-income option. ... As interest rates rise, the prices of preexisting bonds will drop. If rates fall, though, bond prices are likely to rise, causing investors to sell their holdings.

Corporate bonds are issued by companies that want to raise additional cash. You can buy corporate bonds on the primary market through a brokerage firm, bank, bond trader, or a broker. Some corporate bonds are traded on the over-the-counter market and offer good liquidity.

Bonds can be classified according to their maturity, which is the date when the company has to pay back the principal to investors. Maturities can be short term (less than three years), medium term (four to 10 years), or long term (more than 10 years)

The rate of return or yield required by investors for loaning their money to the government is determined by supply and demand. Treasuries are issued with a face value and a fixed interest rate and are sold at the initial auction or in the secondary market to the highest bidder.

Key Differences between Equity vs Commodity

*Key Differences between Equity vs Commodity* 

Both Equity vs Commodity Card are popular choices in the market; let us discuss some of the major Difference Between Equity vs Commodity

• Equity shares are generally listed and traded in stock exchanges like National Stock Exchange and Bombay Stock Exchange etc., while Commodities are getting listed and traded on the stock exchanges like Multi Commodity Exchange, National Commodity and Derivatives exchange etc.

• Equity Markets are less volatile as trades can be undertaken even in a single share, while commodity markets are highly volatile as trades are conducted in huge lot sizes.

• Equity markets are less risky as low volatility is there, the Commodity market is highly volatile as a result of the same these are highly risky.

• Equity contracts have no expiry dates, while commodity contracts have always fixed expiry date on which settlement must take place.

• Equity contracts require an investment of market price only, while commodity contracts require an investment of margin requirement which keeps on changing based on the changes in the price.

• Equity market comparatively has a high amount of liquidity as compared to commodity market as investment happens in the lot size

The holder of the equity instruments is considered as the owner of the company, hence it enjoys all the privileges like dividend, voting right etc. However, such privileges are not available with the holder of the commodity instruments.

Key differences between Debt funds and Liquid Funds

*Key differences between Debt funds and Liquid Funds* 

*Debt funds* 

Debt funds invest in a variety of fixed income instruments. These include treasury bills, government bonds, certificate of deposit, commercial paper, corporate bonds and money market instruments. There are various categories of debt funds. These funds are categorised on the basis of maturity profile. Thus, there are 16 categories of debt funds that include liquid funds, short duration funds, ultra-short duration funds, gilt funds and dynamic bond funds.

Debt funds are considered to be less risky as compared to equity funds. If you are investing with a short time horizon, where capital protection is your major objective, debt funds may be an ideal option. However, this is not to say that debt funds are free from risks. Debt funds carry the following risks, based on the fixed income instruments that they are investing in:

 *Interest rate risk:* Debt funds invest in fixed income securities that are interest bearing. Prices of these funds fall when interest rates rise and vice versa.

 *Credit risk* : Some debt funds invest in securities that carrying a low credit rating. This means that there is a risk of not receiving regular payments from their underlying securities.

 *Default risk:* Though these instances are rare, some funds can face a default risk when the issuer of the bond fails to make the stipulated payment.

*Liquid funds* 

Liquid funds are one among the category of debt funds. They invest in fixed income instruments with a maturity of no more than 91 days. Liquid funds are therefore considered an alternative to keeping your money idle in a savings account. You can also consider liquid funds for the purpose of maintaining a contingency or emergency fund.

*Difference between debt and liquid funds* 

Now that you are acquainted better with debt and liquid funds, let’s take a closer look at their differences based on certain parameters.

 *Maturity profile* 

The first and most obvious difference that can be made between liquid funds and debt funds is on the basis of maturity profile. Liquid funds invest in fixed income securities that have a maximum maturity profile of 91 days. Additionally, these securities are held up to maturity.

However, this restriction is not applicable in the case of other categories of debt funds. The maturity profile of underlying securities of debt fund varies greatly. While there are debt funds such as overnight funds that invest in overnight securities with a maturity of one day, there are gilt funds that invest in government securities with a maturity of 10 years.

*Liquidity* 

Liquid fund, as the name suggests, offer easy redemption facility. Some AMCs offer instant redemption facility on liquid funds. This means you can have the cash from liquidation of your units within 30 minutes into your account. Other categories of debt funds are not as liquid. Maturity proceeds may take up to two working days to come to your account after having placed a redemption request.

*Risk* 

The risk component is considered to be at their lowest in liquid funds. This is largely because the maturity tenure of the underlying securities is very low. As a result, the interest rate risk and credit risk attached to these funds is minimum. On the other hand, there are debt funds that carry a high degree of interest rate risk and credit risk and may offer the potential of corresponding returns.

Hedge fund

*Hedge fund* 

Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives.

Put simply, a hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk. As the name suggests, the fund tries to hedge risks to investor’s capital against market volatility by employing alternative investment approaches.

Hedge fund investors typically include high net worth individuals (HNIs) and families, endowments and pension funds, insurance companies, and banks. These funds work either as private investment partnerships or offshore investment corporations. They are not required to be registered with the securities markets regulator and are not subject to the reporting requirements, including periodic disclosure of NAVs.

There are manyss strategies a hedge fund may use to generate returns. One such strategy is global macros, where the fund takes long and short positions in large financial markets based on the views influenced by economic trends. Then there are funds that work on market-neutral strategies. Here, the goal of the fund manager is to minimise market risks by investing in long/short equity funds, convertible bonds, arbitrage funds, and fixed income products.

Another type includes event-driven funds that invest in stocks to take advantage of price movements generated by corporate events. Merger arbitrage funds and distressed asset funds fall into this category.

Recessions come in many shapes and sizes

Recessions come in many shapes and sizes. However, economists tend to refer to the following four shapes the most:

– V-shaped recession

– U-shaped recession

– W-shaped recession

– L-shaped recession

V-Shaped Recessions: 

V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. A V-shaped recession is a best-case scenario.

The recession of 1990 to 1991 and the recession of 2001—both of which only lasted eight months—are considered to be V-shaped recessions.

U-Shaped Recessions: 

U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again.

The recession from 1971 through 1978—when both unemployment and inflation were high for years—is considered a U-shaped recession.

W-Shaped Recessions:

W-shaped recessions are recessions that begin like V-shaped recessions but then end up turning back down again after showing false signs of recovery. W-shaped recessions are also called “double-dip recessions” because the economy drops twice before a full recovery is achieved.

A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery.

The recession of 1980 that double dipped in 1981 and 1982 is a great example of a W-shaped recession.

L-Shaped Recessions:

L-shaped recessions are recessions that fall quickly and fail to recover. An L-shaped recession is a worst-case scenario because they offer no hope of recovery.

The Japanese recession that began in the early 1990s is considered an L-shaped recession.

Domestic Institutional Investors - DIIs

*'Domestic Institutional Investors - DIIs* 

Domestic institutional investors are those institutional investors which undertake investment in securities and other financial assets of the country they are based in.

 Institutional investment is defined to be the investment done by institutions or organizations such as banks, insurance companies, mutual fund houses, etc in the financial or real assets of a country. Simply stated, domestic institutional investors use pooled funds to trade in securities and assets of their country.

These investment decisions are influenced by various domestic economic as well as political trends. In addition to the foreign institutional investors, the domestic institutional investors also affect the net investment flows into the economy.

*International Funds*

Today's term

International funds are schemes which invest in equities of a region, country or fixed income securities of companies located anywhere outside of the investor’s residence. Offshore funds or foreign funds are also called international funds. They, however, differ from global funds which seek equity to invest in companies from any country in the world.

As an investor, if you are seeking to diversify your risk and take advantage of the global markets, international funds may well be your answer. When investing overseas, developed markets offer you lesser risk because they have the world’s most advanced economies whereas emerging markets offer high returns with significant risk because the infrastructure and economy of these countries have a volatile growth. Underdeveloped countries have the highest risk with the potential for great returns. There are no subcategories of international funds but they are broadly country-specific, commodity-based or thematic international funds. The theme in an international fund can be consumption, energy, real estate or agriculture.

The returns on these funds would depend on the performance of the market they are investing and the currency movement. Retail investors are sometimes not able to factor in currency rates fluctuations in global markets.

*Advantages and Risks* 

The advantage here for an investor is there are many businesses which are not listed in India. So if you want to be a part of the growth story of such companies, you can choose international funds that allow you to diversify across geographies. Sometimes if a certain economy does not perform, other markets may give you higher returns on your portfolio.

This comes with certain risks like currency risk, political risk and liquidity risk. The currency risk here would be the value of the underlying currencies which can boost returns when the dollar is weak and have the opposite effect when the dollar is strong. Political risk means the government’s instability or other unforeseen troubles in the domain of a foreign country you are investing in. The US stock market is fairly liquid where a large volume of stocks is bought each trading day and international funds do stand a liquidity risk. While there are risks and some investors fear the unknown, international equity makes up a large part of the world’s market potential investment growth. Having said that, if you are a conservative investor you can pick a developed market and if you are willing to take some risk, you can choose the developing markets to grow your wealth.

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