2015 could best be summarized as the year that started on positive note but ended well below expectations. Crude Oil price declined sharply, middle-east economics collapsed, China slowed down, gold & real estate prices softened, well established companies like Cadbury, P&G and HUL failed to meet their annual growth targets and stock markets ended lower by 10%. The headlines seem to suggest that it was a bad year for investments. But hey, let’s look a little more carefully.
2015 was also the year when start-ups like Flipkart, Snapdeal, Zomato, etc recorded highest ever sales; IPOs like SH Kelkar,Indigo, Dr. Lal Pathlab and Alkem Labs rewarded investors with ~50% returns in matter of months; small cap stocks like LINC Pens, Atul Auto and Ajmera Realty gave ~30% returns. The writing on the wall is clear – do not focus on headlines, they hide the small but beautiful changes that take place. Instead, focus on stock specific ideas to create wealth.
What’s our market view?
The bull market in stocks which started in 2014 after Narendra Modi became our Prime Minister has almost come to a halt as we enter 2016. Much of it is blamed upon the government’s inability to push crucial reforms such as GST and land acquisition bill. However, the real reason for the slowdown in Indian economy is external – the global economy significantly slowed in 2015 due to oil price collapse (middle-east), the slowing down of Chinese economy and continued recession in Europe.
While Indian economy is a big beneficiary of falling commodity prices, the slowing global economy impacts India’s exports as well as pressurizes debt-laden sectors such as metals & mining. We have to live with the fact that India is slowing down and growth rates of 8% are not sustainable in an environment where the world is witnessing zero to negative growth. This automatically implies that large companies like L&T, BHEL, SBI, ICICI Bank, HUL, etc should witness slower growth and negligible stock returns.
However, the same does not hold true for small companies. Selected small companies could still do well – companies that can benefit from lower commodity prices, companies that can benefit from government orders, and companies that are re-inventing an old product or service. The same old rule of being stock specific continues to apply in the current context.
India’s macro-economic situation is at its best ever – current account deficit is under control, forex reserves are at all time high, currency has been relatively stable. Hence, do not expect a collapse in Indian economy or stock markets. We could fall some more at the index level, but that should be used as a buying opportunity. Interest rates could decline meaningfully over the next twelve months and provide the much needed reprieve to our economy.
Which sectors/ themes do we like?
We will continue to abstain from investing in the metals, upstream oil & gas and banking sector. In general, we would stay away from debt heavy companies in infrastructure space too. We remain excited about specific opportunities in tiles, auto ancillary, plywood manufacturing, pens & stationary, real estate development and SME lending.
Trivia – Paying a dollar for a cent
We bumped into an old friend of mine and ended up discussing our jobs and lives. It triggered our minds into thinking as to how many times do we end up paying a dollar for a cent? It’s quite easy to recognize this when it comes to material objects but very difficult to recognize this when it comes to life changing decisions.
Sudeep (name changed) passed out from one of the top-15 business schools in India, got the role of a logistics manager in a leading paints company and was lucky enough to find a bride of his choice. The newly married couple desired a good lifestyle and soon enough their priorities included buying an expensive smart phone, a sedan and 2BHK apartment. Obviously Sudeep didn’t have all the money he needed and ended up borrowing Rs. 65lacs, to be repaid over 20 years, from a leading bank in Mumbai.
Nothing wrong with the desire to lead a good lifestyle. The only question is – did Sudeep overpay for what he thought was a good lifestyle?
A year after Sudeep bought his car and the 2BHK apartment, he got a job offer from a start-up. Sudeep was excited about the work profile but the lower salary and risk of failure scared him as he had huge debt to be re-paid. Meanwhile, his current job at the paint company started becoming routine and he started looking out for better roles. Well established companies offered him profiles which he found boring while start-ups offered him exciting roles which he could not take out of the fear of failure. It’s been three years since Sudeep is searching for a better & safer job. While he has no memories of the time that he spends at office, his free time is spent thinking about what life could have been had he taken up that start-up job. Just for your information, the start-up that offered him job 3 years ago was Flipkart and his ESOPs would have been worth Rs. 3.5crores.
Sudeep now thinks he overpaid for a good lifestyle. His desire for a good lifestyle killed his risk appetite and eventually lowered the happiness quotient of his life. I am reminded of Benjamin Franklin’s famous quote “great parts of the miseries of mankind are brought upon them by the false estimates they have made of the value of things”. I have seen so many bright individuals over estimating the importance of a good life style and under-estimating the importance of sound investing, thus ending up in a situation like Sudeep.
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.