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.

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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.

How will Nifty behave in the next year and why

It is rightly said that predicting the market levels in the short to medium term is fraught with the hazard of you looking really silly. However, the trends in the market are easier to predict and, with some knowledge and experience in the markets, you  will probably get it right more times than you get it wrong. Let me therefore attempt to try and give some overall predictions of the NIFTY trends between now and March 2018. I have tried to keep all explanations in simplest of languages and devoid of any jargon.

To begin with one will need to understand the key factors behind market performance in our situation. The determining factor in the markets is the amount of money pumped in and out by the FII’s. Most people do not understand this and keep looking at other reasons which are not quite so important. Now, the FII money will come in when they feel putting money in Indian markets is going to be better for them as opposed to other developing or developed markets. However, it can also go out when it becomes apparent to them that some other markets are relatively more attractive.The other important factor for the markets is of course the growth in corporate earning. As we all know real growth or the potential of it will help market up move and vice versa. The third important factor is some structural issues in particular industries, for example Metals, IT , Pharma etc. This may not effect all companies but if the sector has a good representation in the Index then the impact on the market levels can be serious. The final factor is sentiment based which is normally news driven – again either real or perceived facts.

So what is the environment really telling us right now. While there are many issues the most important ones are as follows:-

  • The US elections are expected to result in a win for Hillary Clinton. If Donald Trump manages to pull off an upset that will be a shock for the markets. This will be a bad news for Emerging markets as more money may flow into US at our cost.
  • The Fed rate hike is a given and this is again a negative trigger for the FII money to see a sell off.
  • Our own interest rate cycle is probably bottomed out or there is at most one more cut amounting to 25 bps. The bad news is that the stock price movement in the rate sensitive stocks we have seen lately will now come to an end.
  • Sectors such as IT, Banking, Pharma which are vital to the NIFTY are having serious structural issues now and are likely to see serious declines.
  • In general corporate earning growth has again disappointed this quarter and now the whole pressure will be in the next 2 quarters to deliver this FY. Given the indicators in most sectors this does not look very likely.
  • Auto sector, Consumer durable and the FMCG sector are likely to do well based on the good monsoons and 7th Pay commission outcomes.

As you can see from here, there are very few factors which are positive for our markets. I think the trend is clearly going to be negative and a 5 % correction on the Nifty is quite imminent. In case there is a major FII sell off then the correction will be way deeper and it can easily be 10 % or more. Over the next six months local factors such as the budget, assembly elections, GST implementation etc will hold sway and the outcome of most of these are again likely to be negative for our markets. I therefore anticipate further weakening of the Nifty till March of 2017 or so. Thereafter, assuming that there are no real shocks for the rest of the year in the global economy and markets, money is likely to flow into the Indian markets and we should end 2017, probably at the highest point of the year.

What are the Nifty levels we are talking about? Probably a low level between 7000 and 7500 by March 2017 and a high level between 9000 and 9500 towards end 2017. While the level of 7000 can be breached I do not feel this will happen for the 9500 level. Do remember that levels are far harder to predict and all numbers here should be taken as indicative and not absolute by any means.

Assuming that this is a reasonably accurate projection of the next 15 months, how will it be affecting your existing investments ? How will it make sense to invest in this period? Let me address it in another post.

Nifty call and investment rationale for rest of FY

Any prediction of the markets is always a hazardous job but in order to benefit from the markets one must attempt it nevertheless. For the last few months the Nifty has ranged between 8400 and 8900. It has threatened both these levels several times but have not been able to break out in a decisive manner. The Indian situation in terms of the economy has been improving but the overall global economic environment and therefore the market sentiments have really not been positive.

This has resulted in the Nifty finding good support at 8400 and even 8600 recently, mainly due to the high availability of cash being brought in by FII players. At the same time, it has faced resistance at 8900 as at that level the valuations become rather unattractive. As we wait for the Q2 results, we are observing a strange situation. At long last corporate earning growth for several sectors in the Indian economy, most notably Auto/Cement are looking up. With a supportive global environment. one would expect the Nifty to decisively cross the 9000 levels and make new lifetime highs by the end of 2016. Unfortunately the serious headwinds in terms of the US Fed hike, US presidential elections, situation in Europe/Japan, now rising crude prices and the fallout of the BREXIT impact will not enable us to see these Nifty levels.

So what will be a call on the Nifty then? I think the following scenario will play out:-

  • There may be fluctuations of the Nifty on both sides of 8500 levels in October, to the extent of 300 points. I think we are more likely to find support at 8500.
  • In November and December the US news will dominate and any event there will probably have a negative fallout for our markets. If the Fed rate hike takes place as planned, we will easily see 8000 levels being breached on the Nifty.
  • Between January and March 2017, local factors such as the budget and state election forecasts will dominate the news and sentiments. This will result in the Nifty being in the overall range of 8300 to 8700, depending on how things pan out.
  • By the end of 2017 a pessimistic Nifty projection will be 9000 and an optimistic one will probably be about 9500. It is very unlikely to be either lower or higher by much more (say another 200 points).

Based on this, how should you plan your investments?

  • If you want to rejig your MF portfolio, get out of your unwanted funds when the Nifty hits 8800 or so in the next rise. You can then wait till 8300 or lower to invest in the funds of your choice. I have about 7-8 funds which I plan to deal with in this way.
  • Over the next 6 months or so, SIP will actually be a good way to invest. You can put most of your annual money in the next 6-8 months and then stop your SIP for the remaining part of 2017. For my part I plan to invest the remaining 40 % of my MF investments when the Nifty gets close to 8000. It is likely to be in December.
  • As far as stocks go, keep your shopping list ready and add to your portfolio by seeing the right prices. Keep a watch on the DMA figures closely between now and the next 3-4 months. There will be serious buying opportunities.
  • Pure debt instruments will give lower returns over the next 2 years or so. Even then keep investing in PF/PPF/SSY as per your regular plan. Duration funds may be a risky bet as there is a possibility of the interest cycle turning.
  • Arbitrage funds will not make much sense going forward, unless you are purely using these for short term goals. Gilt funds again will give higher returns but are fraught with risks.
  • I will focus on MIP, Equity Savings Funds and some hybrid FMP in the debt space. Returns from pure debt FMP will be low, so not much point in being locked into such schemes for 3 years.

Overall between now and 2017 end will be a rather interesting period and I do think thart my call on the Nifty figures will largely hold good.

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.

Is there a case for selling equity now?

The liquidity driven rally in the indices and several stocks has been the flavor of this monsoon season. In the beginning of this financial year the opinion of most analysts were that there can be a possible correction and the Nifty would probably settle in the range of 7700 to 8200 over a period of 4 months. Thereafter things would be taken care by the first quarter results. Indeed when the markets started to rally and crossed the 8200 levels with relative ease, the consensus was that the corporate earning would justify the rise.

Now that several companies have declared their results for the first quarter, it can be safely said that the results have been a mixed bag and there is nothing really in them to indicate strongly that the lacklustre showing of corporate results are a thing of the past. In fact while the Auto companies and several banks have shown encouraging results many other sectors have been clearly disappointing – IT, Aviation and FMCG to name a few. So what does this portend for our markets, the Nifty in particular? 

For starters, there are really no immediate triggers left for the markets. Both the GST and the good monsoons have largely been factored in the rally which we have witnessed in the past few months. In any event, the actual impact of these will not be felt in the Q2 results. Given this situation it is kind of tough to see Nifty getting a serious lift from the present levels. Yes, the liquidity factor along with some other good news can push it to near 9000 levels but it will be very difficult for it to sustain it there. In simple terms, I think that there is a far greater case for a Nifty downside to 8200 and below in the next 2 months as opposed to an up move to 9000 levels. In this context, does it make sense for an investor to sell off his equity holdings partially and enter later at lower levels? 

People who are holding a direct stocks portfolio will be familiar with this simple mechanism. You can move out of a stock at a level where you feel there is unlikely to be any more upside in the short run. Over a period of time you can decide at what level would you like to re-enter the stock. At the very least you would try to add to the stock at certain lower levels, even if you do not book profits. Of course, this requires a deeper understanding than just looking at Nifty levels but the rewards can really be stupendous. There are people who sold Maruti at 4600 last year and then bought it back around 3500, to now see it climb back to 4700 again. If you owned even 100 shares of Maruti, this strategy would have given you a cool tax free profit of 1.2 lacs.

What about MF in that case? Most investors who are into SIP are led to believe that they should adopt the Hero Honda strategy of, “fill it, shut it, forget it”. But in reality is this a good idea? Like in the case of Maruti stock, will you be leaving a lot of money in the table if the Nifty really goes down rapidly from here and your MF scheme NAV declines alarmingly. At some level, your fund manager is taking care of this but it will do no harm to take an active stance in this as well. Many investors have investments of 3-5 lacs in an MF scheme. Even a 10 % drop in the Nifty levels will mean significant amounts of money. Remember, this is clearly like a tax free bonanza that you can use for many of your discretionary expenses and even for additional expenses if you so desire.

More importantly, many of us have collected stocks and MF schemes over a long period of time. These do not fit into our current plans very well but we may have been too lazy to sell them or have not found it worthwhile. With the market levels being where they are for all types of indices, it may be a pretty good idea to sell some of these. You can channelise the money into your current portfolio depending on the right market levels. Also, if you are stuck with a long standing SIP in a fund which you do not like any more, this will be the perfect opportunity to get out of it lock, stock and barrel.

Is there a risk that Nifty can just go up unidirectional and well past 9000? I do not think so and even if it does, it will come down at some point. Remember you will be holding cash and that is also an asset.

In the next post, I will outline how I want to adopt this strategy for my own investments.