Some crystal ball gazing for the next year

If you are an Indian then you are probably seized of the importance that the next 12 months, or even 11, have in store for the country. It is not easy to predict the outcomes in different aspects of life as much of these issues are quite complex in nature. However, it will be safe to say that whatever the outcomes, they are likely to change things for the country in a significant manner. In this post, I will try to do some crystal ball gazing into 4 important areas, namely Society, Politics, Economy and Markets.

Let us look at society first and, I think most of us will agree that we live in very divisive times today. Whether it is division along class lines or on community lines, there is a lot of basic mistrust that people have for each other today. This is manifested in the bitter invective political parties come up with, in communal skirmishes in several parts of India, lynchings on suspicion of kidnapping children and so on. The law and order machinery has pretty much broken down with rapes, assault and mob lynchings being a daily occurrence, as opposed to the exception they used to be earlier. The society is also divided along class lines – industrialists perpetrating big financial frauds on the banks seem to get away, while indigent farmers have to commit suicide as they are not able to pay small loans back to the banks. Nothing seems to be sacred any more – army men are pelted with stones, anti national slogans are shouted in the name of freedom and people cynically debate as to whether one needs to stand up to the national anthem.

Unfortunately, over the next 11 months or so I think the society is going to get more polarised along communal, caste and class lines. With the BJP in power, the right wing fringe groups have got emboldened and violence has become a way of life for both these people and the ones they oppose. For the political parties a divisive agenda is the only way to bring out a good electoral outcome and they will not do anything else. The court judgement on the Ram Mandir issue will add to the polarised atmosphere of the country and the movement towards an Uniform Civil Code will heighten communal tensions. The only way is to tighten law and order by being tough to all perpetrators of crime, without fear or favour. However, in an election year that will never really happen.

Politics is, of course, at the core of everything that is happening in our society today. For both BJP and the opposition the 2019 elections will be a game changing one. When BJP lost unexpectedly in 2004, it took them 10 years to come back in power, even though the UPA ran a shoddy and corrupt government. The opposition knows they have been lucky not to have their misdeeds exposed and judged in the current term of the government, but their luck will not hold if BJP gets another term. With this backdrop both sides will do everything possible, both fair and foul, to win at all costs. The by poll results have shown that if the opposition comes together, it is tough for the BJP to win in today’s scenario. However, a lot of this can change in the next 11 months, BJP will hope it does.

My assessment is that the opposition will never agree to the simultaneous election idea that BJP is so keen on. Congress knows that it has chances in MP and Chattishgarh, with Rajasthan almost certainly going to them. It therefore makes sense for them to show BJP on a losing wicket when it goes for the Lok sabha elections. The only way BJP has out of this is to hold elections in January or so and get these 3 states as well as Andhra Pradesh and Telangana clubbed. This has a definite element of risk as Bajpayee had found out in 2004 and many in the BJP will remember that lesson. In any case, BJP will probably have to bite the proverbial bullet as the alternative is certainly worse. Whichever way it decides to go, I cannot see it getting anything more than 250 and anything less than 200 seats. If it is the former then there will be enough parties who will tag along for them to form a government. However, anything less than 230 will really mean a Karnataka like situation where everyone will come together to keep the BJP from power. I think 250 is a possibility but for that to happen large sections of the society will need to support the BJP as they did in 2014 – the health program, MSP pricing, Kashmir having President’s rule, possible solution to Ram Mandir are all geared towards this.

What of the economy then? It is now clear that the corporate results are on the way up, though in a slow trajectory. The tax collections are fairly robust and the initial glitches with GST are improving now. Good measures like the bankruptcy code and declaring absconders as fugitives will make sure that people do not take banks for a ride. However, the expenses of the exchequer have increased manifold due to the Universal health scheme as well as the MSP increases. This, along with the refusal to reduce taxes on Petrol/ Diesel will unfortunately create an inflationary impact in the economy. The RBI may well be forced to increase the interest rates and coupled with the depreciating Rupee against the US Dollar, there is a good chance that the economic recovery might get stymied. The government is hoping that the effects of this will be only visible after the elections but people who know will be able to see this portent quite clearly.

Finally, how will the markets fare in all of these. Right now, I see the Nifty being in a range of 10000 to 10800, with a possible negative bias. If elections are held separately and BJP loses the assemblies then a fall to 9000 and below is quite feasible. In the event of BJP losing in the Lok Sabha and being unable to form the government, a 20-25 % downside from the 10000 figure is reasonable to expect. On the other hand the relief will be palpable if BJP somehow comes back to power and a rally to 11000 plus, maybe nearing 12000 can be expected.

So there you have it – a swing of 8000 to 12000 is possible. This is the kind of excitement that many expert investors seek in the markets in order to make money. For most of us though, such volatility is really not desirable. How should they deal with their investments in this turbulent period?

I will write about investor strategies in the next few posts.

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Are we still in a Bull market?

In several discussions about our stock markets, the inevitable question that comes up is – Are we still in a Bull market? At times the people asking the question are really not aware of what a Bull or a Bear market is, they are merely articulating what they have read somewhere or heard on the TV channels. In this post let me try and define these a little, in the context of our markets over the last 15 years or so.

So let us start with the basics – the long term returns for Nifty has been in the range of 14% over the last 3 decades or so. You can define a Bull market as a period of time where the returns were significantly higher than this. In the 2003-2007 period the returns were in excess of 30% as Nifty went from about 2000 to 6000 odd levels. This period can therefore be definitely classified as a Bull market. The corporate profits grew 4 times in this period and the PE ratios approached the high 20’s by the time the run ended.

Contrast this to the period 2008 to 2015. The annualized return on the Nifty was well below the 14% mark. Though the markets went up and down the overall trend was negative. Volumes were generally muted and the overall sentiment was a negative one. This was very clearly a Bear phase of the market. This phase ended in 2015 December and since 2016 beginning we are in a Bull phase again.

It is important to note that in a Bull market there is often a possibility of fairly deep corrections, often more than 10% and at times even to the extent of 30%. In the last Bull run of 2003-2007 there were more than 10 such corrections. The recovery of the markets from such corrections ranged between 2 and 6 months. Even in the present Bull market which started in 2016 there have been 3 instances of such deep corrections. In each of these cases there was recovery in the markets and it went up more than it had fallen.

So, coming back to the main question of the post, are we still in a Bull market? There is a very interesting twist to this answer. For front line stocks ( say top 100 ) the profit multipliers have not been great yet and neither are the PE ratios at a very high level. So the indicators do not signify an end to the Bull market soon. From all available data it seems likely that the run will last till 2020 end or even more. Of course, unexpected events such as the incumbent government losing power can signal an abrupt end to it. In the meantime there will be deep cuts from time to time and investors should use it as an opportunity to buy more.

The broader markets with Mid cap and Small cap stocks are a different story though. Here the individual stocks have been battered down quite badly, in some cases being down by 40 to 60 % from their peak price. Though the recovery may yet happen, it is likely to be rather slow. In case it goes into a deep time correction without recovery then we will have to say that a Bear run has started for this part of the market. As Indian companies grow at different levels this may well become the norm where different part of the markets exhibit different buying levels and interest.

On the whole though, I am inclined to think that we are in a Bull run for the overall market – maybe more so for the large caps and less so for the others. Unless BJP loses 2019 polls, it is very likely that the run will continue till 2022 which will be the mid point of the next government.

Nifty outlook for 2018 – Troubled but with some hope

When I look at what has happened in 2018 with the Nifty so far, I definitely get a sense of deja vu. A decade back in 2008, the Indian markets were flying high with the Nifty having crossed 6000 in January. At that time too, there were global rumblings on the sub-prime crisis, though the Indian context was not really an issue. We all know from history what happened. We went into a sharp and brutal correction initially, followed by years of listless performance till 2014. What many investors are worried of now is whether there is a chance of history repeating itself and , more pertinently, what is likely to happen in 2018. Let me try and share my observations in this post.

To begin with, let us understand one major difference between 2008 and 2018. In the former year, Indian markets had a very strong dependence on FII money and they could crash the market by pulling out whenever they had any inkling of bad news. Over the years, with the domestic retail money coming into the market through SIP in Mutual funds, the dependence on FII money has reduced a lot. As of now we really do not know how the domestic retail investors will behave when they see sharp cuts in the markets. In the past few years, they have not panicked when there were some cuts but what we are looking at now is going to be more serious. My own take is this – given the increased knowledge about goal setting and financial planning, it is unlikely that there will be panic on a large scale. Yes, some people will book profits and take out money fearing deeper crash, others will lower their SIP contributions but these will not be impacting the markets in a serious way.

So what are the factors that will play a greater role? As usual one will have to look at performance of earning as well as the news driven sentiment in the markets. I can think of the following issues for 2018:-

  • The society and the polity are clearly divided along serious fault lines in India. The opposition will oppose everything and even try to manipulate to have any chances, the government is in no mood to listen to any advise, even if it is good one.
  • The impact of the budget will be important for elections in 2018. If BJP wins in Karnataka along with some North Eastern states they will be tempted to call for an early election. I somehow think this will not happen though and the General elections will be held in 2019 only.
  • The elections will definitely be fought along 2 large blocks in 2019. Throughout 2018, the election results for the states will have a high impact on the markets.
  • Budget implementations, especially on the GST and welfare schemes will have a positive impact on the markets.
  • Earning growth is clearly starting to happen now. If this goes well in the next few quarters, the Nifty will shrug off the current panic and move forward. However, this will not be the year of decisive growth, it will be incremental at best.

With these factors playing out, how do I see the Nifty move through 2018? Well, to start with, I think it will go down to 10000 or even 9500 over the next 2 months. If the yearly results are good and some of the election results and GST figures show BJP in a good light, recovery will start slowly. Even then, any decisive move is only likely if the BJP wins the Karnataka elections – this looks quite difficult as of now. In the absence of such a win, this will be slow going year for the Nifty, waiting for triggers in the form of quarterly results. Assuming that the current trend of earning improvement continues and there is a good monsoon as widely predicted, Nifty will probably recover at a faster pace in the latter part of the year. Here are my predictions for the Nifty then:-

  • 9500 by March end 
  • 8500 by May end if BJP loses Karnataka to Congress
  • 9000 by July end with good monsoons, GST collections and Q1 results
  • 10000 by October end with good agriculture news, welfare scheme implementations and earning growth for H1
  • 11000 by December end if BJP wins at least 2 out of the 3 state polls in Rajasthan, MP and Chattisgarh.

In a pessimistic scenario many things can go wrong – Oil prices can continue to rise, inflation can get out of control, Monsoons may play truant, earning growth may be muted and BJP may lose most elections. In such a scenario Nifty may well end the year 2018 languishing at around 9000 range.

On the balance though, I think we will be getting back to 11000 though the route will be rather tortuous as I have described in the post.

How will Indian economy and markets fare in 2018?

The Indian economy and the markets are poised at a very interesting point. Throughout 2017, the markets were on steroids supported mainly by the huge influx of domestic money coming into SIP. The economy was a different story – there were structural reforms such as GST carried out but our growth was decidedly sluggish and the improved earning many had thought was just around the corner did not materialise. Will this change in 2018? What are the contributing factors and how are they likely to play out over the course of next year?

To begin with, the GDP growth fared a tad better last quarter as compared to the prior one. However, if one looks at the subsequent IIP numbers and the exports data, it is evident that there is not a great deal to be enthused about as yet. Agriculture too is a big concern at this point of time. If you add inflation and fiscal deficit to this mix then a growth rate of 7 % will not be easy to achieve, though it is probably still possible. From a revenue perspective the GST implementation is getting better and it can be hoped to achieve stability by the end of the fiscal year. The recapitalisation of banks, bankruptcy laws and reduction in subsidies are all steps that will stand the economy well in the medium term. However, in the short term these can all cause a fair deal of pain.

In the above backdrop, there has been some positive signs of earning growth. With the monsoons having been normal largely, rural growth has revived to some extent. At the same time agrarian distress is also a fact of life. Farmers are not getting the right MSP and are unable to service their loans. While loan waivers cannot be a solution at all situations, there is a need to manage this in some manner. Consumer goods and Auto sector have largely been buoyed up by increased demand and this is also reflected in their stock prices. Infrastructure spends and affordable housing are two great growth stories that will play out in the next year. If the overall earning growth revives in 2018 it will obviously lead to sustained growth in the markets.

One critical factor in India is always the budget and this is determined, more often than not, by the political context. As of now, the BJP is quite wary of the opposition getting together to thwart their relentless march. Given that this is likely to be the last full budget, there is a good chance of some cheer being spread. On the taxation side this may mean some relaxation of the rates on both personal and corporate income tax. This will put more money in the pockets of the people, thereby boosting consumption. Increased spending in infrastructure, education, healthcare, housing are likely to take place. All of the above should have a positive impact on the GDP figures, assuming that inflation is contained and there are no negative news on the monsoon front.

Assuming the above plays out what will be the impact on the markets? Well, for one, the markets can very easily get spooked if the BJP loses any of the important elections of 2018. The smaller north eastern states will not matter too much but if the BJP loses in Karnataka, Rajasthan or MP then the markets may well correct fairly deep. We all saw what happened when BJP trailed in the initial counting of Gujarat votes. One key assumption in the markets is that the current initiatives will continue and that is possible only if the BJP remains in power. Businesses are very clear that any alternate party coming to power is going to be largely detrimental for the economy. Now rationally BJP cannot win all elections but any elections that it loses will see deep correction.

Given the significant rise of all our indices in 2017 and the above complex scenario, it is safe to assume that the growth will not be as spectacular. However, it is still likely for the Nifty to be at a level of 11000 to 11500 by the end of 2018. The path to it may be tortuous though and Nifty may well test levels of 9500 or even lower, should something unexpected happens. Individual stocks may see greater purchase and it will therefore be important to look at these too in addition to the MF route. The downside protection of indices is fairly robust, given the overall strength of the economy as well as the huge amount of money being pumped in through the SIP route in MF.

If this holds true, how should you be investing in 2018? I will cover that in the next post.

Investment ideas of 2017 with potential high rewards

As I have written regularly in my blog. I do not believe in reinvention of the wheel. When I want to decide on where to invest, I do not fire up a spreadsheet and do all kinds of calculations to arrive at a conclusion. I think it makes a lot more sense to go with people who are professionals and do this for a living. As such, I have been watching a lot of television shows lately having Analysts and have benefited from their ideas.

Before getting into specifics of each asset class investments, let us look at the overall situation in the asset classes first. Equity has done quite well last year and is likely to continue the trend for the next 2 years. A Nifty level of 10000 plus is almost a given and how far it will go from there remains to be seen. Debt had also done rather well last year but with the interest rates almost bottoming out now, it is unlikely to repeat these returns in the current year. As far as Real Estate goes, it is definitely a good time to buy a house if you plan to stay in it. However, if you are looking at RE for investment purposes, I will not recommend it at all. Rental yields in India are still quite low and with the recent cap on interest expense that can be charged off, it just does not make sense. Gold is never really on my radar for investing, so I will not comment on it.

Specific to Equity the following factors are at play right now:-

  • Markets are fairly valued if you see that they are at 17 times 18-19 earnings.
  • ROE of top rated companies are at 12 % and this needs to improve.
  • With economic activities increasing, consumption will be on the rise and capacity utilisation of companies will pick up, leading to better margins.
  • Investment through retail is increasing and ticket sizes of transactions are going down. This is a healthy sign from an investment perspective.
  • As savings increase in the economy, more money will inevitably find its way into equity. Real estate is no longer a favoured option for the retail investor.

Based on this the following calls can be taken for the current FY:-

  • Infra stocks are likely to do well between now and next General elections, driven by the aggressive outlays in this area. You can look at select Infra stocks or go with a MF scheme with focus on Infra sector companies.
  • IT stocks have been beaten down, primarily due to issues related to the US situation. These are good companies, going at fairly good values now and are definitely worth a contrarian call. Pick up good IT stocks or invest in a good MF scheme with technology focus.
  • Pharma stocks have had a similar fate with their pricing woes and the FDA situation from US. Again, these are good companies that will do well in the long run. Also worth a contrarian call with both direct buying as well as a Pharma MF.
  • Dynamic asset allocation can be a good option for people who are not inclined to look at asset allocation route. ICICI Balanced Advantage fund or Franklin PE ratio fund can be good choices in this regard.

The calls here do have a higher risk as compared to the plain vanilla SIP most of you do, but the rewards will be significantly higher too. If you have the stomach for it, I suggest you go for it in this year. I know I will be doing so myself.

How will the Nifty perform now and in 2017?

As expected the Nifty levels hit a fresh high as a result of the positive sentiments emanating from the election results. The market players like stability and after the results there was renewed FII buying. However, it was not a runaway rally as many had predicted for 2 reasons. Firstly, a lot of the possible BJP victory in UP had already been factored in. Secondly, there are some serious factors which will come into play in the medium term.

So to address the first issue, where does one see the Nifty in the next week or so? Given that the March expiry is next week both transactions and medium term fundamentals will be pertinent. From all technical analysis the Nifty has serious resistance levels at both 9180 and 9220. If it is able to cross both these points then it is likely to rally for a couple of hundred points more. However, in terms of probability that is rather unlikely and like this week, the markets will probably be range bound. On the down side Nifty has strong support at 9050 and again at 8975 levels. In case both of these break there is every possibility of a deeper correction in April. Again, in probabilistic terms this scenario is also not very likely and therefore, we will probably be in a range of 9050 through 9200 for most part in the week.

What about 2017 then? Well, many analysts believe that an overall growth of Nifty by 15-25 % in the year is possible. So, given that we started 2017 at levels of 8000, we should be able to get close to the 10000 mark. As usual, there are many factors that can make this happen or prevent it from happening. Here are some of the key ones.

  • GST implementation from July 1st
  • Monsoon performance and whether the EL Nino effect is a serious one
  • US Fed rate hikes and impact of it on FII buying in our markets
  • Earning growth showing positive signs finally in this FY
  • Infrastructure spending by government to increase in the next 2 years or so

What is my call on the Nifty? Well, I think we may well get close to 10000 by the end of this FY but the path will obviously not be a linear one. There is a possibility of a sharp correction of about 10 % and that may well happen in the months of May and June, especially if the monsoon predictions turn negative and the GDP and IIP numbers show an unexpected decline. The route Nifty will take from 9100 now can well be as follows, though predictions are hazardous : 9100-9250-8700-8500-9000-9400-9200-9500-9700-10000. Each of the ranges may last for several weeks or months. While the route is tough to predict with any real degree of accuracy, I do think Nifty will end with 9700 plus by the end of this FY and may very likely get to 10000.

What does this mean for your investments this year and how should you plan them. Let me get back to this in another post.

Restructuring my MF portfolio in 2017 – why and how

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Micro cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty goes to 8750 etc. Once the quarterly results and budget are through and the state elections happen, our markets are very likely to down to 8000 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the last post. I am sure that if I buy these at Nifty levels of 8000 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong budget, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 9000, as I do not believe that is a value at which the Nifty can sustain itself.