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.

MF buying, index levels and 2017 outlook

To begin with, let me state that I was rather impressed by the readership of my last post as well as the comments posted. I have tried to respond to the individual ones but felt that it would be a good idea to address some common issues. Even before getting into it, let me state that I have no pathological dislike for SIP – in fact as a marketing professional, I feel that SIP has been an outstanding marketing success, so much so that many people even think that SIP is` the product they have invested in !! My only objection comes from the basic fact that SIP is a completely wrong way to buy equity as an asset class.

Let us now get to the objections. They are broadly as follows:-

  • SIP is easy for salaried people as otherwise they cannot say whether they will spend the money or not – I hope this issue is addressed through the real life case study that I shared.
  • People will find it difficult to keep track of index levels etc.
  • How do I know that Nifty will simply not keep climbing and reach 9000 and beyond levels, thereby not giving a chance for people to invest in MF.

In order to understand this, we will need to look at historical levels of the Nifty over the last 2 years or so. 

  • On February 7th 2014, Nifty was at 6023. This was the low point of the UPA and it started to rise from there.
  • On May 16th 2014, after the win of Modi and BJP Nifty hit a level of 7203. At that point most analysts predicted 9000 levels quite soon.
  • On March 5th 2015, Nifty hit a level of 8937. For the first part of Modi regime the Nifty had climbed almost non stop with only occasional blips.
  • On Jan 1st 2016, it was at a level of 7963 and kept going down to below 7000 on the day of the budget which was 29th Feb 2016.
  • Nifty ended 2016 at a level of 8185.

You can see from here that the Nifty has really moved nothing in the last 2 years. Yet we expect it to move by 2000 points or so and that too continuously? We might as well believe in fairies and ghosts 🙂

Coming to the current year, we clearly need to understand that the whole rise and fall of Nifty and other indices are largely FII money driven. With the US and some other markets doing well there will be tough choices for the FII brigade as to where they should put in the money. If the stability of the government and the policies that it espouses seem to resonate well in terms of BJP doing well and the economy showing high growth in terms of the corporate earning then Nifty may well climb again. 

So what is likely to happen? Right now, Nifty fair value is sub 8000 but it is very likely it may have a run up in the period till the budget. If it crosses 8600 or so that will be a major victory for the bulls and may push it up even beyond 9000. However, that is unlikely and I think Nifty levels will oscillate between 7900 and 8500 depending on the budget outcome. If BJP loses UP in addition to Punjab then 7900 is very likely to be breached on the downside. In any case, corporate earning in this calendar year will only improve in Q3 or so due to the demonetization effect and therefore Nifty will probably rise in the last 3 months of the year, given the revival of FII interest in our markets.

The route from today is thus likely to be as follows, 8300 – 8000/8500 – 7700/9000, 8400/9500. I personally think a 10 to 12 % return on the Nifty is quite possible from the start of the year when it was around 8185. Given this it is clear that you do not want to buy at levels of 8800 and 9000 and subject your investments to another year of mediocre returns. That is what they had in 2015 and 2016 when you bought at high levels through SIP and are now seeing much lower levels.

From my perspective I bought in 2016 at very near the lows of the year and avoided buying for most part till the very end. In this year too, I am hoping to buy in the sub 8000 levels of the Nifty and hopefully much lower. In order to do this we will need to track the Nifty over the months and have some idea about some directional trend.

The point is, even if you do not get any chance to invest and have the money in Arbitrage funds you will still make 7 – 8 %. This is more than what the Nifty has done over the last 2 years. In reality the markets will always give you opportunities and you just need to be aware of these.

Let me address this in the next post.

In 2017 politics will decide market movement

Even a casual observer of the stock markets will know that there is a close link between politics and the market performances at most times. Market movements are often decided by news flows and in many parts of the world, particularly in India a lot of these news are from the political arena.

Till about 2 months back the narrative in the markets depended largely on corporate earning growth and the US Fed rate hikes. Both of these were thought to be determining factors in how the FII buying would pan out. As our markets depend a great deal on FII inflows, the overall consensus was for a dip in the start of the year and a pick up as time went by. The budget was likely to be a positive one and a Nifty high of 9000 plus sometime in the first half of the year seemed a definitely possibility.

Demonetization and the subsequent political realignments have changed all of this greatly. At a basic economic level it is clearly visible that several sectors have been affected badly due to liquidity issue and also the overall sentiment regarding consumption has a negative bias now. The FY 17 earning growth is therefore likely to be fairly flat, belying the promise that was evident till the second quarter. The government can point to the tax collections but markets will only consider the growth in corporate earning and that will not be good.

At a purely political level, the exercise and the subsequent coming together of disparate political parties in order to challenge it has created a somewhat unstable situation which is bad for the markets. In general the markets like status quo and is worried whenever some negative disruptions take place. The election dates being announced for the 5 states have made the situation more complicated. It may mean that the budget is delayed and the current political climate also makes the GST roll out difficult by April 1. 

And then of course, there are the elections due in 5 states. They were always going to be important but with the demonetization backdrop, they have virtually become a referendum on the Modi government. Should the BJP lose significantly there will be serious questions on whether the policies Modi wants to practice have any resonance with the citizens of the country. Such type of political uncertainty will inevitably see FII outflows and deep market cuts. How is it looking currently? Well, the BJP will probably retain Goa despite an upsurge from AAP, lose Punjab where their partners have a lot to answer for, win in Uttarakhand where the corrupt Congress government has definitely run their course and may continue their North East success with a win in Manipur.

As often in the past UP will have a huge say in Indian politics – win it and BJP will claim all their policies are a success. Lose it and they will have to be on the retreat for the next 2 years till the general elections are due. In the first scenario both the Economy and the markets will revive quite well in the latter half of 2017. The FII buying will resume with enthusiasm. In the latter scenario a likely sell off from the FII’s will be accompanied by deep red in our markets, maybe even a crash.

In the latter part of the year Presidential elections and the different cases the CBI is pursuing against opposition leaders in different parties will also have a bearing. With good wins in the elections the BJP will be able to deal with these easily, losses will dent it’s moral authority and they will need to be more conciliatory with the opposition in order to get things done. Also there are 62 Rajya Sabha seats to be decided next year, if the BJP can get most of these and strike a deal with AIADMK then their Rajya Sabha woes can be largely over. This will leave them a few months to pass whatever legislation they want and go into the 2019 elections in a confident mood. In Indian politics, the road to Delhi always passes through UP , this year will witness that once more.

How will Nifty be affected in the different scenarios? There are a lot of alternatives to be played out, let me address that in the next post.

My stock choices for investment this Diwali

More than the new year or the financial year, traders in the stock market consider Diwali to be the beginning of their investment year. If you look at the performance over the last Samvat to this one we will see that the Sensex and Nifty have given about 10 % returns whereas the mid cap and the small cap index have given returns in excess of 20 %.

How will things work out for the next one year? From all indications the following outcomes are quite probable, with the normal caveat of all market projections being a hazardous game at the best of times:-

  • Nifty will probably be choppy through the year and end up with about a 7-8% gains from the current levels. 9500 will be a great level to achieve, I do not see Nifty crossing 10000 in 2017.
  • Mid caps are doing quite well now and will face a correction. Unlike in 2016, the next year will be the one where large caps will probably do better than mid caps.
  • Small cap index will continue to do well and will be the best performer.

Which stocks will be worth buying this Diwali with a hope of gaining at least 30 % and above in the next 12-18 months? I have been following a few of the good analysts and traders to understand what they are recommending and why. Based on that here are some of the stocks which are likely to do rather well. Make sure you do your own learning before you invest in any of these.

  • Kingfa Science
  • Rajratan Global wires
  • Cineline India
  • Jayant Agro
  • EPC Industries
  • Praj Industries
  • BEL
  • Vindhya Telelinks
  • CARE
  • Sadbhav Engg
  • ILFS Transportation
  • UCAL Fuel
  • KEC International
  • INOX Leisure
  • Indo National
  • Umang Dairy

While I have a few of these stocks I am planning to add some of these to the extent of 3-4 lacs between now and end of year, based on the right pricing levels. The idea will be to see if the investment can give an XIRR of about 18-24 % and double in the next 3-4 years. I plan to use the amount for a family vacation outside India for all 4 of us.

How do I know that such returns will be there? Well, I do not really but having looked at these stocks closely, it does seem to me that these companies will definitely have great chances of growth in the next few years.

MF managers are not yet into some of them, so go ahead and grab your chance while these are still reasonably priced. Wishing all my readers a very happy and prosperous Diwali.

Asset allocation is an imperative now

One of the main reasons stock market and other bubbles get created is that we all love good times and good stories. It gives us an emotional kick to see that a stock that we hold has gone up by 10 % in a couple of trading sessions and the MF portfolio we hold has been clocking impressive gains over the last few months. In our heart of hearts and also in our rational minds we do know that the party will end, sooner rather than later, but it is far more exciting to believe that it somehow will not.

We all understand asset allocation at a fundamental level so I am not going into details. However, in simple terms for most portfolios of investors, the following need to be kept in mind when we are looking at asset allocation:-

  • Assuming you have 2 main asset classes Debt and Equity, decide on an asset allocation for yourself. 
  • In my view you must have at least 35% in Debt. This is fairly easy once you take your PF account money into consideration.
  • Periodically review to see if the allocation has got skewed by more than 5 %. In such cases sell from the higher asset and buy into the lower one.
  • For example, right now due to the run up in the markets your equity allocation may be 72% and debt 28 %. Sell off some equity and put it into a debt product such as Liquid fund etc. This provides your partial hedge against a market downturn.
  • What to sell? Again, look at stocks or MF which have run up the most and use your judgement as to which looks like the best bet.

What is my take on the current situation? I feel that there is a little more steam left in the markets yet, the Nifty may well reach 9000 levels by next month. However, beyond that there is every likelihood of a correction to 8500 levels and below.I do not believe that we will really see a crash in the Indian markets in the near future.

Based on the above premise take a serious look at your asset allocation this week and next. It is tough to sell something which is doing so well but you are really protecting some gains and limiting your future losses by doing so. Many people may tell you that you should simply hold and that the gains will again come back in the future. However, that is speculative and asset allocation is a way better strategy which is also a proven one.

I am sure you have never done it in the case of your MF portfolio built up through SIP – one more reason why the way SIP is done and administered, leaves a real lot to be desired.