It’s been 3 months since we were all discussing the negative implications of BREXIT, REXIT and the other fancily coined terms. While BREXIT has had some impact on globally focused technology companies like Infosys & Wipro, India as a whole seems to be emerging stronger. This has forced dozens of global investors to look at India in a positive light and some of them have even gone far enough to call India as “the bright spot in darkness”. This talk has been backed by record investments made by foreign investors in India and markets clocking new 52-week highs. In fact we are at a striking distance of crossing the previous life time high and making a new one.
While the Sensex is up by only 10% from its BREXIT lows, few very important events have happened in the past three months – 1) the monsoons have been satisfactory across major parts of India, 2) the benefits of seventh pay commission have started reaching the government employees and, 3) the present government was able to kick-start the process for making GST a reality. As a result, stocks that benefit from these (tractors, 2-wheelers, auto components, plywood and logistics) rose by 20% to 50% during the three month period. In fact the BSE Small Cap Index has already made a new life time high. All this highlights the same point again and again – Headlines hide the small but beautiful changes that take place below!
What’s our Market View?
Indian economy is at a very interesting juncture – while there are no big bang changes that are sweeping the country, there are numerous small changes that have the potential to add up to something big in the years to come. Let us illustrate this further. The present government has talked of “doubling the farmer’s income by 2022”. Narendra Modi has no magic wand to orchestrate this, especially in an environment where food inflation is low and rainfall is erratic. However, his solution is clear – I will re-distribute the money in the farm value chain from middle men to the farmer. As a step towards that, this government has introduced subsidized crop insurance, cracked down on food grain hoarders and ensured that subsidy transfers happen through Aadhar enabled DBT. A big part of the money which was being pocketed by middle men in the Congress era is now reaching the farmers. Imagine how the consumption pattern of rural India will change when their incomes double – may be they will buy more cookers, motorcycles and biscuits. Some big investing opportunities can emerge here.
A confluence of favorable economic cycle and a determined government has resulted in visible improvements – India has transformed from coal importing nation to a coal surplus nation; banks have begun their clean-up act; road construction activity is picking up; crony capitalists are crying foul; guilty contractors and builders are being punished by the courts; Add to that the strong macro-economic position of our country – current account deficit is under control, forex reserves are at all time high, currency has been relatively stable. India never looked so good.
It is reasonably clear that Indian markets will be at much higher levels in times to come. There could be intermittent volatility (globally induced) but that should be used as an opportunity to buy. Given that we are not at a stage where every aspect of the economy will do well, the usual caveat of being “stock specific” holds. India is a country where hundreds of small businesses are becoming bigger by the day and investing in them can make a serious difference to your wealth.
Which sectors/ themes do we like?
We will continue to avoid large companies like TCS, Tata Steel and Tata Motors of the world. We will also abstain from investing in the metals, banking and debt heavy infrastructure and real estate companies. We remain excited about specific opportunities in kitchen ware, jewellery, plywood manufacturing, pens & stationery, real estate development and NBFC space.
Trivia – Multiple Income Streams
Based on our interactions with several working professionals, (mostly MBAs), there is one commonality that I have encountered – Salary is the only source of income for most of us. Very few of us even think of building alternative sources of income. So let us dedicate this trivia section to the “creation of multiple income streams”.
Theoretically, the probability of making it big in life with only a single income source is very low. Let us assume that salaries keep growing at the pace of 12% every year. A quick calculation will tell us that this is far lower than the growth rate of our living expenses. We know that our desire for better lifestyle, better travel and better facilities for our children will ensure that our expenses grow at 15% to 20% annually. So the question now is that how can a salaried person create an alternative stream of income.
Our generation is much luckier when it comes to creation of an alternate income stream – there are start-ups sprawling everywhere, there are great fund managers & investment advisors willing to point out good opportunities for a fee. There are start-up platforms willing to borrow money from you at 13%-15%; there are real estate NCDs sold by IIFL &Piramals of the world that can earn you a fixed income of 15%. And finally there is the stock market where you can invest in the company of your choice. Below is an interesting real life story of working professionals whom we happened to meet recently.
1) Urvashi Shah graduated from her B-School in 2008 and joined a technology consulting firm at a salary of Rs. 11 lacs. Hailing from a Gujarati family, investment was part of her day to day life. She made it a point to invest 25% of her salary in stocks (through an advisor), 25% in fixed deposits and the remaining 50% was available for living a comfortable life. She never bought a house and preferred to stay on rent with her husband. Over the last eight years, Urvashi has invested Rs. 25 lacs in stocks and Rs. 25 lacs in fixed deposits. Her stock portfolio has grown to Rs. 90 lacs and her FDs are worth Rs. 40 lacs as on date. Through her investments, Urvashi has created an additional income of Rs. 80 lacs over the past eight years!
2) Rakesh Bhadra too graduated in 2008 and joined a FMCG on a salary of Rs.12 lacs. Hailing from North India, investing in stocks was nowhere in his radar. Rakesh lived a simple life and saved ~60% of his salary. After having managed to save Rs. 30 lacs in the first four years of his professional life, he decided to buy a house. He used his savings for making the down payment and took a home loan of Rs. 70 lacs. Fast forward to 2016, Rakesh has little savings as he periodically prepays the home loan. He has an outstanding loan of Rs. 40 lacs and a house whose worth is Rs. 1.2 crores. That takes Rakesh’s networth to Rs. 80 lacs (Rs. 50 lacs lower than Urvashi).
One can easily figure out that Urvashi’s portfolio will give her an additional income of Rs.18 lacs every year (assuming a modest 15% return) while Rakesh will have no additional income except his salary. The networth difference between Urvashi and Rakesh is only going to increase with time. Urvashi’s position is so strong that she can buy Rakesh’s house without resorting to a loan. But she is smart enough to realize that real estate market is in a long term slowdown while stock market is in an uptrend.
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.
Names have been changed to protect the identity of the individuals