Memo 12 – Market View

Market view series completes three years today. We are happy to see that the original objective of encouraging salaried and self-employed youth to invest in Indian stock markets is gaining traction – a lot of you have written back to us, some have opened demat accounts and even enjoyed the fruits of long term investment. Through our trivia section, we continue to highlight financial situations that you will encounter in your normal course of life and how logical thinking can improve the quality of decision made by you. This series has an interesting success story of a corporate employee working in a leading FMCG company.

What’s our market view?

After rallying sharply on hope of an economic turnaround, the stock markets have taken a pause and entered a consolidation mode. The quarterly earnings have turned out to be a dampener – revenue growth was slowest in the past ten quarters, margins were muted and earnings were lower than expectations. Investors are realizing that the much awaited economic turnaround will be a slow process and a sector specific process.

At the same time, there is an increasing discontent among industrialists that things on ground haven’t changed much even after a year of Narendra Modi’s rule. We disagree with that view and believe that things are moving slowly but surely. This Government has a different style of functioning – it has spent the first twelve months in breaking India’s infamous bureaucrat-politician-industrialist nexus. For the first time, industrialists are not receiving favors from Delhi; bureaucrats are working twelve hours a day and hand-in-glove contractors are unable to win projects due to transparent auctioning systems. This government has the courage to sacrifice near term GDP growth in favor of system clean-up. We believe that Modi Sarkar is genuinely trying to change things and laying a clean foundation for multi-year growth.

The government is likely to unleash its capex program soon and this will kick-start the Indian economy. We expect sectors like Coal mining, renewable energy, affordable housing, defense, road construction to witness some ordering activity in the next twelve months. We are confident of the economic recovery, but unsure about the exact timing of it.

We continue to believe that India is in a multi-year bull market and that more wealth will be created over the next five years. Not to mention that the decline in commodity prices and strong forex reserves has ensured that India’s macro situation looks promising. The same old rule of being stock specific continues to apply in the current context. 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.

Which sectors/ themes do we like?

We are of the opinion that investment appetite of the private sector is in doldrums and it is only through Government spending on capex that the economy can be revived. The new government is slowly but steadily unfolding its capex plan through defense, coal mining, renewable energy and affordable housing sector. We continue to remain excited about some specific opportunities in these sectors. Also, there are other evergreen stocks in NBFC and automobile space that should give you 15-25% annual returns.

Trivia – Entrepreneur in you

While Silicon Valley has been the global innovation hub for many years now, India too has witnessed its own version of the technology & e-commerce success. More than 10,000 multi millionaires have been created over the past five years through the start-up / ESOP route. Newspapers are replete with stories of how the Bansal’s (Flipkart), Arun Mohan (Jabong) and Pranay (QUIKR) made hundreds of crores by selling stakes to private equity investors.

Quitting your job and creating your own start-up may sound like an exciting way to become a multi millionaire. However, it’s not possible for most of us to do it – there is a risk of failure, there could be lack of business acumen or lesser than required entrepreneurial zeal. For those of you who are not too excited in taking the start-up route, I would like to share success stories of few ordinary corporate employees.

Nilesh (name changed) joined a leading FMCG company “X” as management trainee in 2004 with a CTC of Rs5Lac per annum. Approximately 15% of the CTC was to be received in the form of X’s stock. His CTC increased as per standard FMCG increment and currently stands at Rs35. Lacs per annum. Over the last 10 years, Nilesh has earned a cumulative salary of Rs. 2.2crores from X of which he received X’s stocks worth Rs. 32lacs.

Given the appreciation in X’s stock price, the value of this stock holding is Rs. 1.2crores today! In addition to this, Nilesh has savings worth Rs. 50lacs in FDs. The point to note is that Nilesh has been an average performer within X and managed to have savings of Rs. 1.7crores at the age of 35. This is no ordinary feat, most of you would agree. Also note that Nilesh has rented a spacious 3-BHK in DLF Gurgaon and drives a Honda city, implying that he spends his salary liberally.

What worked in Nilesh’s favor? Nilesh could see that X is doing well and decided to keep X’s stock for long term. This way, he was able to get the upside from the success of his employer. Most of us don’t appreciate the commercial strength of our employer and avoid taking ESOPs or holding them for long term. Some of you might be working in organizations that have the DNA to be successful. ESOPs can go a long way in creating wealth for you. We know of many more success stories in organizations like HDFC, Axis Bank, HUL, Blue Dart, CIPLA, Sun Pharma, Kotak Bank, etc.

For those of you whose organizations are unlisted or do not have business strengths, they should take the stock market route for wealth creation. It’s an indirect way to entrepreneurship where you can invest in companies you believe can become really successful. Some portion of your salaries should be invested in either equity mutual funds or in stocks suggested by your investment advisor. It will go a long way in building your wealth.

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.