ASSET CLASSES IN 2019

In continuation to my article in 2018; there was mixed performance of Asset classes in

2018, I would restate that there will be good returns in asset classes like precious metals,
base metals, agricultural commodities and stock market in coming 2 years; the
performance of each asset classes will be directly linked to the movement of US dollar
(USD) currency. The prediction was more or less correct in respect to US stock markets
and EMs. Base metals shall lead the rally, followed by agricultural commodities then the
Crude Oil and precious metals. USD Index is rising/ appreciating since April’18 and
since then precious metals, base metals, EMs and EM currencies performed badly. USD
Index declined during the first quarter of the year 2018; thereafter from April’18 it is
going up and reached a high of 97.50 levels during the fag end of 2018, where every
other asset classes underperformed with lower returns. Along with mid-year volatility,
mostly asset classes like base metals, crude oil, EMs currencies; remained slightly weak.
Gold gave 2% negative return on annual basis. Stock Markets in USA remained range
bound whereas few Emerging stock markets (Brazil & India) performed flattish to
positive by the year end of 2018 while some (Mexico and Hong Kong) with negative
returns. So there was a mixed trend in EMs depending on the fundamentals of respective
markets. Hard and soft commodities are strongly correlated to money supply by way of
money printing/ supplying and Quantitative easing or tightening so would be their
performance. USD Index is still under pressure from long term point of view but it
formed a low at 87.50 (1st quarter of 2018) and risen to 97.50 during the end of 2018 but
closing at 96.17. USD Index should break the level of 87 before it could stabilize and at
the same time Gold and other precious metals should start an upward rally and should
reach historic high in coming years. Crypto currency like BITCOIN has lived upto my
expectation where the bubble burst from 19600 levels (January’18) to 3145
(December’18) during the year of 2018 and it can be compared to Tulip Bubble. It is the
classic example for the world in current scenario how things can be still managed by the
knowledge resourced human beings.

US Fed Reserve indicated that Quantitative tightening of money supply is on auto pilot
mode which means there is no firm direction on the decision and it also started increasing
interest rates gradually to 2.25 – 2.50 % per annum which is good for US Dollar and
negative for commodities and precious metals. But inherit weakness in the US economy
by the way of increasing debt level and eventually falling into self-woven debt trap,
would lead to decline in US Dollar. There is possibility of Quantitative easing during the
year 2019 and dovish stance by US Fed Reserve where it may stop increasing interest
rates. There was an exceptional performance of Crude Oil during the year 2018 where is
went up to 76 with 25% return by the end of 3rd quarter and quickly crashed to 42 during
the end of the year 2018. With money tightening and rising interest rate there was one
choice left for the investors and the money managers that was to chase US Dollar as safe
haven which led to underperformance of assets like commodities and emerging stock
markets. It shall prove to be short lived as money supply has to go up to fill up the fiscal
deficit and debt servicing by the US government. This is the advantage of US Dollar
being universal currency and also there is no debt of foreign currency on US government
but the local currency (US Dollar) which is manageable to an extent. Eventually, increase
of money supply by US government and inherit weakness in US economy by the way of
huge debts piled up cannot be neglected, hence the tide would once again turn towards
weakness of USD index and higher prices of other assets classes like stock markets,
commodities and precious metals. ECB (European Central Bank) already indicated that
they will not increase the interest rates for next 1 year which was also the reason for the
upward rally in US Dollar because of high interest rate environment. The real intend of
US government is to keep US Dollar weak and gradual higher interest rates but no
support from Europe and Japan to increase interest rates in their respective countries also
led to strengthening of US Dollar. US Federal Reserve Bank is forced to postpone the
hike in interest rates for the same reason so that US Dollar should not run away. USD
index have a strong technical support at 87 levels which had proven to be correct where it
went up from 87.50 to 97.50, instead of sideways movement which was expected as
stated in the last article. There are chances that USD index can cross below 87 levels in
2019 but surely in coming years. Problem still persists and it is not yet addressed that
how the governments of developed nations would reduce the huge debt, so the turmoil in
future is obvious, hence rally in precious metals and commodities. Make hay while the
sun shines because the new bubble to unfold and burst shall take 2 more years (say by
2020) as the 1st intermediate upward got completed along with the 2 nd wave of correction
in crude oil, base metals and such other commodities; where at the same time precious
metals like Gold, Silver and others have not yet participated with any kind of reasonable
up move. Commodities like base metals and precious metals bottomed out from October
to December 2016, up move throughout 2017 and correction in the year 2018.
Technically, there should be robust up move for all kind of hard and soft commodities
which shall spill over to 2020. Precious metals still have to make any first intermediate
up move; in fact they are laggards and can be good opportunity to invest.

The mixed performance is seen in emerging stock markets since one year with flattish
returns and gave a foundation of stronger rally ahead. From 1st quarter of the year 2016 to
January 2018, the performance of most of the emerging stock markets remained upwards
with least volatility but volatility shall increase going forward as it was evident from last
quarter of 2018. After the long up move with periodic corrections for 12 to 18 months,
majority of stock markets remained sideways with upward bias since middle of 2016.
Gold looks like completing its final time correction and shall be ready for strongest
historical rally which is justified to back the currencies in the world especially Germany
and USA, where the worth of currency shall be backed by strong Gold value and all the
investors and hedge funds would have no choice but to invest in gold. Correction in Gold
price from historical peak of USD 1940 in 2011 after 9 year bull rally from the level of
280; has completed its price and time correction. Base metals shall move upward
gradually in comparison to precious metals so would be emerging stock markets. Increase
of interest rates and change in stance to Quantitative tightening by US Fed Reserve led to
demand for US Dollar and sell off in precious as well as base metals during year which
also increased the volatility.

The financial year 2019, shall be with increase of money supply and limited opportunities
to invest, which would result into inflating commodity prices, eventually leading to hyper
inflation in most of the economies of the world. Top investment bankers in USA expect
EPS of 170 – 175 for S&P 500 for the year 2019 which means forward PE ratio of 15
which is not expensive. US Fed Reserve also indicated that interest rate hike shall halt
sooner and there may be 2 hikes in 2019 which is likelihood of discounted news by the
smart money investors. Situation will be straight forward where adverse news shall abate
during the year except for trade war abrupt news (may be positive or negative) and bull-
run in base metals shall go to new heights. Gold and silver shall also witness upward
movement. Coming years may see the period of Stagflation where money supply shall
increase and interest rates going up and it would bring more political crisis, geo-political
problems would arise, collapse of US treasury bonds, nation debt crisis, may be war and
any other new crisis in a new form shall emerge where the time shall tell. In scenario like
this once again safe haven would be Gold, other physical hard assets and commodity
stocks.

THE new digital currency called as Crypto Currency like BITCOIN exists since 2009
where the mechanism of supply and demand is still a known knowledge to few only. The
concentration is on price inflation and not to know the fundamental of such new asset
class. Bitcoin was hovering around USD 1000 during 1st quarter of 2017 thereafter it
rallied to USD 19600 in the month of January 2018 resulting into 20 times return in 12
months which is a bubble in crypto currency by any standards. There was a mad rush to
buy crypto currency as there was word of mouth publicity and people all over the world
are hoarding to it with utmost optimism or it can be called ‘irrational exuberance’. It is
strongly recommended to sell Bitcoin. It is a biggest bubble ever and shall be a case study
in college syllabus how irrational exuberance persists even after learning from the past as
behavioral pattern of human psychology never change where it can be seen from
economics and medical perspective.

Technically speaking:

S&P 500 (USA)

Current Level 2500 (approximately as on 31-12-2018)
Last time I had predicted about DJIA which proved to be absolute correct as there was a
steep fall from 26th January’18 and thereafter rallying to 26800 forming a double top
during the year whereas NASDAQ made a convincing new high of 8100.
S&P 500 remained slightly negative (down 7%) for the year 2018 which was around
2700 levels at the beginning of the year 2018. There is lot of optimism. 50 Moving
Average crossed over 200 Moving Average where there is risk of convergence and trend
may change, however we may witness full blown euphoria before the bubble burst. On
weekly charts, S&P 500 is at neutral position where consolidation and range bound
movement between 2500 and 2900 shall remain before any meaningful crossover of 2900
levels to enter into euphoria zone. Such irrational exuberance may end at 4000 levels and
shall end very badly. The view remains the same that the bull market is still intact with
volatility to increase in coming months. It is passing the stage of intermediate correction
wave of long bull market.
Commodities based equities shall outperform the other sectors of the market.
Avoid is recommended for long term investment and buy at dip with speculative range of
full year volatility between levels from 2400 to 2900 where S&P 500 can hit new highs
but with a caution above 3000 level rather with a recommendation to SELL at level
above 3300.

BSE Sensex (BSE - India)

Current Level 36068 (as on 31-12-2018)
BSE is moving up with many intermediate corrections after forming a bottom at 16000 as
on May 2012. Early 2016 at the level of 23000, BSE after completing the deep
correction; is right now on upward move. BSE Sensex gave 6% return for the year 2018
in Indian Rupee terms.
Buy was recommended at 34050 levels in the last article with target of 44000 which
proved to be correct to an extent where it nearly reached 40000 level.
Buy is recommended at current level for target of 49000.

By Ankur Sharda

http://www.scribd.com/doc/6014281/A-Guide-For-Discerning-Investor

www.myspace.com/ankursharda