Memo 18 – Opportunity or Adversity?

While there is no disputing the fact that last three months were tough for most of India, few things still managed to hit an all time high – number of whatsapp messages on our phones, the number of people expressing their opinions, the number of counter-opinions and the intensity of media’s rhetoric! It was information overload at its best. Relentless media coverage of the long queues & deaths at the ATMs, pictures of deserted mandis& trade markets, farmer distress, deaths at hospitals due to non-acceptance of old currency,etc forced most of us believe that the situation is very grim.

The investor in us always knew that India is a very resilient country and that such situations could be great buying opportunities. But the analyst in us prompted us to wait for data to substantiate my claim. As we write this article, below is some data that has already been reported:

  • Most microfinance companies, who lend to 5 crore+ poor families, could collect ~90% of the amount that was due, despite demonetization

  • Most FMCG companies (barring Colgate, which has a big Patanjali impact) did not report revenue de-growth for the Oct-Dec quarter

No marks for guessing that Indian investors lapped up the opportunity and Indian Markets are again at a striking distance of the previous life time high. All this highlights the same point again and again – Headlines may not be the best source of information, you need to look beyond them!

Was demonetization drive a success or failure?

Clearly, the stated objective of “unearthing black money” was not achieved. Most rich & elite could “convert” their undisclosed income for a 10% to 30% hair-cut, thanks to the cooperation extended by bankers, jewelers and builders. However, that’s not the only barometer to judge the success/failure of this demonetization drive. The campaign may still be termed successful if it is able to improve tax compliance & collections, increase transparency in government dealings and accelerate the shift towards a digital economy in the long term.

To us, this Government seems to have a vision and is determined to achieve it, no matter what the consequences. Clearly, Modi is more socialist than capitalist or populist. He doesn’t want the rich & elite to remain “all powerful” (and that has got a lot of them worried), nor is he too doting towards the middle class. Most of his policies and resource allocation are aimed towards eliminating corruption & nepotism and uplifting rural folks and the urban poor.

What are the clear trends that have emerged?

Interest rates are slated to remain low: The huge flow of money into the banking system resulted in sharp decline in interest rates in India despite the sharp surge in interest rates in US. Also, given the structurally declining inflation in India, it’s only fair to assume that the low interest rate regime will sustain for a few years. Good news for borrowers but bad news for depositors. Bank FDs are yielding mere 7%, you will really need to look for better avenues to park your hard earned money.

Real estate slowdown will continue for few more years: It’s not uncommon to pay a crore rupees for an apartment that is ninety minutes away from your workplace, hardly has any amenities and may have a crematory or a gutter near-by. The rampant politician-bureaucrat-builder nexus and their black money is one of the biggest culprits. The demonetization drive has somewhat hit this nexus (not as much as we would have liked) and the artificial demand is close to dead. Expect property prices to remain stagnant and builders to offer good discounts to prospective buyers.

Rural economy is where the action is: In a year where government’s revenue has increased by mere 14%, it has increased its rural spending by 24% (budget FY18). This is in line with Modi’s agenda of doubling farmer’s income by 2022. The writing on the wall is clear – this government will spend a lot of money in rural areas till the election of 2019. While there is not direct way to benefit from it, once can certainly invest in companies that operate in this economy. Farm equipment, 2-wheelers, cookers, dairy, irrigation,etc are sectors where investors can bet.

What’s our market view?

India’s macroeconomic situation remains extremely strong. We have achieved the holy trinity of low fiscal deficit, low current account deficit and low inflation despite the slowdown in western world. The fact that Indian Rupee did not depreciate much despite the strengthening of US$ post the election of Donald Trump is a testimony to that. The means that the probability of a sharp decline in the stock markets is extremely low. Intermittent volatility should be used to BUY stocks.

However, India continues to be at a stage where not every aspect of the economy will do well. The long term impact of GST and Demonetization on the un-organized sector is not yet clear. As such, we don’t expect markets to go up much on the index level. However, there will be fantastic opportunities in specific areas and the usual caveat of being “stock specific” holds.

Which sectors/ themes do we like?

The sharp decline in interest rates could generate opportunities in the troubled sectors like power, infrastructure, corporate banks and real estate. This was in our “avoid list” for the past couple of years but now, it’s time to look for opportunities here. We arevery positive on stocks of Mumbai / Pune based real estate companies involved in middle class housing (though weam very negative on real estate prices).

Consumer sector remains replete with opportunities – we like Jewellery, Dairy, Plywood and NBFC sector. In fact, we could add some of these stocks at lower levels for our investors (they are already up by 20-30% from their December lows). We would continue to avoid the IT sector – the TCS, Wipro, Infosys of the world. Automation is a bigger threat to them than Trump. We fear huge downsizing over the next five years in this sector.

Trivia – Lazy investing

Our topic for today’s discussion is based on an old wisdom which says that “Half knowledge is a dangerous thing”. Of the small minority of working professionals who believe in investing, most of them sub-consciously practice what we call “lazy investing” i.e. once they take an investment decision, they stick to it for many years without evaluating its performance or without taking into account the changed reality of the economy. Let us illustrate my observation through two real life stories:

  1. Nirmal Rao graduated from his B-School in 2008 and joined Accenture. Pro-active that he was, he created a financial plan for himself in the first year of his job and started investing Rs. 2 Lacs per year in ICICI’s ULIP plan. Disciplined as he was, he continued to invest for the next eight years, hoping that there will be a pot of gold at the end of the rainbow. In 2016, to his disappointment, the value of his Rs. 16 lacs of investment was still Rs16lac only (In eight years, it would have doubled even in a bank FD!). Dejected and disillusioned, Nirmal consulted an investment advisor and realized that his ULIP charged him annual fees of 7% of his investment amount. Also, his ULIP was heavily invested in Infrastructure sector which was down and out.


  1. Chandan Garg, another B-School graduate of 2010, purchased his dream house in Noida in 2013. His parents praised his investment decision and couldn’t have been happier as their son had the proverbial “roof on his head”. Fast forward to 2017, Chandan’s house has given him 0% appreciation. He got fired in one of the downsizing rounds at a prominent e-commerce player and has an EMI burden of Rs. 45,000 on his head. Chandan failed to see the deep slowdown that had set in the NCR area real estate. Investing in a house had worked well for his parents, but miserably failed for him. More than that, he did not gauge the increased uncertainty in our jobs. It’s just too risky to take a 20 year loan when you have no idea if your employer’s business will survive over the next ten years.

The world is getting increasingly uncertain and business cycles are getting shorter. Automation and protectionism are threatening low skilled jobs in IT & manufacturing sector. While we have no control on it, we can definitely be prepared for it – try and create multiple income streams so that your dependence on salary income gets lower with age. Be really careful while buying a house on loan – you may not get the property appreciation and you will have to bear the burden of EMI in an uncertain job environment. Buy a house only when you can afford it without a bank loan. Bank FDs and gold will provide you the safety but not the returns. For higher returns, stock market still remains the best avenue. Do not hesitate to seek professional help for your investments.

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