Rupee's new alpha

We introduced the idea of relative ranking a few months ago. Relative ranking is based on divergence of price performance between assets. Larger the divergence, larger the inefficiency between a group or pair of assets, and larger the possibility of a time arbitrage. Initially, when we started with performance cyclicality and ranking on Indian assets, we looked at sector and stock ranking separately.

In the new Alpha approach, we look at numeric ranking and performance cycles from a currency perspective. We compare 54 Indian equity assets with the Indian rupee Index. How does this help us understand performance? As we have mentioned on prior occasions, time cyclicality reflects irrespective of the benchmark or the comparison parameter we choose. And, since all indices and stock prices are already expressed in Indian rupees, plotting them against the currency index should also give an absolute indication of price direction along with the under- or out-performance ranking status.

Our coverage includes 54 assets - 12 sector indices (including the broad market), 15 early economic stocks, 12 mid economic stocks and 15 late economic stocks. Early, Mid and Late economic are Orpheus classification of sectors. Early includes information technology and financials, Middle economic is made up of industrials and Late economic consists of staples, energy, utilities, materials and pharmaceuticals.

As economic cycle changes, the Early, Mid and Late economic will move in and out of performance. The new Alpha could give us an indication where the economic cycle is headed tomorrow and where the money is going to flow.

Metals is still the top potential out-performer, along with three metal stocks: Sterlite, Tisco and Hindalco. This should not look surprising as metals were under-performing just a while ago. Metals' ongoing out-performance suggests our running pairs, short Nifty-long Sterlite and short Nifty-long Hindalco should continue to deliver gains. Our top potential under-performer stocks are ONGC, L&T and M&M.

On the sector side, consumer durables, auto and capital goods are at the top of the numeric ranking list and, hence, the potential under-performers.

We did a similar exercise to create a global portfolio. We added the following 55 assets. Forex (with various international currencies as well as Indian), energy (crude, natural gas, gasoline, heating oil, petroleum, carbon emissions, Brent, WTM, energy index), metals (precious metals, tin, zinc, nickel, copper, platinum, silver, industrial metals index, gold), agro (coffee, corn, grains, livestock, sugar, wheat, soybeans, cotton), thematic and global equity (coal mining fund, shipping fund, Dow Industrials, sense, agricultural equity, water, nuclear, Russell $2,000, Russell $1,000), bonds (international as well as Indian).

Sensex is nearing the top of the equity group and is a clear under-performer compared to the Dow. Gold is higher in ranking. Relative performance cycles suggest gold's continued under-performance against industrial metals and oil. Among thematic and global equity selection, shipping is the top most sector and Sensex follows immediately. This means that both shipping ETF trading in London and Sensex should underperform Dow Industrials.

After stagnating for almost 12 months, Sensex under-performance against Dow Industrials does not ring an encouraging bell. We remain negative on Sensex on an absolute basis also as we head into the third quarter.

The authors are employed with Orpheus Capitals, a global alternative research firm