It’s been six months since the last update and stock market performance has been nothing short of euphoric. Markets made new life time highs and traders, investors and various other market participants enjoyed an extended period of easy money making. We are happy to see our thesis playing out – that there is immense wealth waiting to be created in the stock markets over 2012-2017. Our opinion is that India is in a multi-year bull market and that more wealth will be created over the next five years. Gold and real estate are showing signs of a multi-year slowdown, thus leaving stocks as the only avenue for earning high returns. Those who wish to start stock market investing in a systematic manner can write back to us.
What’s our market view?
Stock markets have literally been on steroids since the Narendra Modi led government go elected with a thumping majority. Markets have rallied 30% while individual stocks have rallied 20% to 150% over the past ten months under the hope of strong improvement in corporate earnings. The Q3FY15 corporate results however turned out to be a dampener – revenue growth was slowest in the past ten quarters, margins were muted and earnings were lower than expectations. It served as reality check for the investors post which the markets has entered a corrective phase. At this juncture, we try to analyze three pertinent questions:
1) Has anything changed on ground since this new government came to power?
2) How long will it take to see meaningful change at the ground level?
3) Are there enough opportunities where money can be made even after the huge rally?
Unlike the previous regime, this government has a different style of functioning. Instead of big bang announcements and little implementation, priority has been accorded to executing small tasks at hand in an efficient manner. The coal auctions that garnered Rs.200,000 crore for the state governments, the telecom spectrum auction that garnered Rs.100,000crore, the higher devolution to states, implementation of the Direct Benefit Transfer (DBT) and the pragmatic budget are the biggest achievements of this government till date. All this and the numerous other measures taken will translate into meaningful economic growth slowly, but surely. It’s not fair to expect a nation’s economy to turnaround in a year, when even small companies take years to turn around!
Not to mention that the decline in oil prices as well as other commodity prices puts India in a sweet spot. We remain hopeful of strong economic revival in the coming years. However, there is something different about this economic revival. Not all parts of the economy will benefit equally. There will be winners and losers. We have to be very stock specific in our approach if we have to make good returns over the next few years. The markets and individual stocks are no longer cheap and only those stocks will make you money where there is strong revenue & earnings growth in the future.
Which sectors/ themes do we like?
The new government is clearly unfolding its capex plan through the following sectors – defense, roadways, railways, renewable energy and affordable housing. We are very excited about some specific opportunities in this space. Also, there are other evergreen stocks that should benefit disproportionately from the impending economic revival. Investments in them will give you 15-25% annual returns for the next three years.
Trivia – Is your fascination for home ownership hurting your progress?
The ‘makan’ part of the proverbial ‘roti, kapda, makan’ has got so deeply ingrained in the Indian psyche that owning your house is regarded as one of the biggest milestones of your life. Having seen the plight of many of my friends in their 30’s spend all their savings as well as future earnings (20 year home loan), a slightly unconventional thought passed our minds. Is it really necessary to buy a house when you are in your 30’s?
The arguments usually presented in favor of owning a house are pretty simple – firstly, it gives you a feeling of safety that you always have a place to go to. Secondly, property prices will keep on rising perpetually, so it’s better to buy it sooner than later. The arguments on the flip side are – the need to pay monthly EMIs will tie you down to your jobs. It will completely take away your risk taking ability exactly at the time when you should be taking risks.
While you are paying your EMIs, you will have little left to invest in stocks, bonds or start-ups. You will also reject any entrepreneurial opportunities that will come by your way. By the time your home loan is re-paid, you will be in your 40’s and your risk taking ability would be significantly lower. You will get the safety of a house but you lose the chance for making big in life!
After deeply reflecting upon the pros and cons of buying a house, we have come to conclude that it may not be a bad idea to postpone your home buying decision to 40s. Meanwhile we need to make some effort to try and deploy our capital in a more productive manner in the next 10 years. Our folks have seen a 15 year bull market in property and hence may urge you to invest in property. But there are enough signs that suggest that the bull market is over and property markets in large cities will witness a five year correction.
If there is still a need to buy a house, don’t buy beyond your means. Leave some money on the table for experimentation with stocks, start-ups, etc.
P.S: Equity as an asset class in extremely rewarding in the long term, however only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.