Memo 19 – From famine to feast!

Steve Martin, an American actor, once famously said “the public has a short memory, that’s why we can make terrible movies and still get back in business after two years”. It’s been just 150 days since the much criticized demonetization exercise ended but the swing in sentiments have been nothing short of incredulous. Be it the media or ourwhatsapp messengers, the tone has clearly changed from impatience, anger and despair to hope, opportunity and optimism.

The data coming out of corporate India is surely not grim – Maruti and Honda sold the highest number of vehicles last month, HUL reported 6% growth in volumes for the quarter gone by, HDFC Bank gave the most optimistic outlook and collection efficiency for most NBFCs have reached pre-demonetization levels. It’s only natural that stock markets continue to make new highs.

Investors who got scared and sold their stocks during demonetization couldn’t stop cursing themselves while those who bought stocks are laughing their way to their bank accounts. At the risk of sounding repetitive, we would re-iterate that Headlines are not the best source of information and you need to look beyond them!

What are the clear trends that have emerged?

Bank deposit rates will continue to shock you: Moderate inflation, huge flow of domestic money into the banking system due to demonetization and the huge flow of foreign money in India’s stock and bond markets will ensure that interest rates in India remain subdued. Good news for borrowers but bad news for depositors. Bank FDs are yielding mere 6.8% and you will need to look for better avenues to park your hard earned money.

Don’t buy that dream house of yours as yet: The inflationary expectations in real estate are dead! The demonetization, RERA and the huge unsold inventory in all major cities will ensure that property prices may remain stagnant for a few years. Real Estate as an investment class is dead, at least for two to three years. More on this in the Trivia section at the end of this memo!

Infrastructure & rural economy will remain the focus areas: This Government seems to be more socialist than capitalist or populist. Most of Modi’s policies and resource allocation are aimed towards eliminating corruption & nepotism as well as uplifting rural folks and the urban poor. Now that BJP has won the UP state election with a thumping victory, it is almost a foregone conclusion that they will win the national elections in 2019. When a government has seven years to plan, lot of good work will be done in the rural, road, railway and construction sectors.

Stock market is where you need to be: As explained in our previous artcile“Your dollar earnings have just started losing its sheen”,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 global turbulence. India continues to remain “an island of stability” in an otherwise uncertain world and the probability of a sharp decline in the stock markets is low. Intermittent volatility should be used to BUY.

However, one has to remain cautious after the runaway rally of the past three months. Newspapers, CNBC and TV experts are all talking about “finding multibaggers” and mediocre stocks are being touted as next multi-baggers. Thanks to whasapp, a lot of folks who are only superficially involved in the markets are advising other inexperienced people to buy them. It’s important to have a systematic plan in place and not make emotional decisions due to the fear of being left out. Markets will clearly be at higher levels in the times to come, but not all sectors and stocks will do well. One has to be in the right sectors and the in the right stocks to make outsized gains.

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 five years but now, opportunities are emerging in this space. We are very positive on stocks of Mumbai / Pune based real estate companies involved in middle class housing (though we are negative on real estate prices).

Consumer sector remains replete with opportunities – Dairy, Plywood, gold loan NBFCs and financial product distribution companies. 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 – Times are changing, so should your habits

For most working professionals, financial year end is usually the time to celebrate. Be it an increment or bonus or a role change or simply the fact that New Year has started. However, this March was a little unusual. My inbox was flooded with eight resumes from acquaintances working in Snapdeal, TCS, Wipro and Accenture. While Snapdeal was no surprise, the fact that talented people were fired from TCS, Wipro and Accenture made a case for further inspection.

Technology is one sector where we have consciously refrained from investing – partly on account of our limited expertise and partly on account of its fast changing nature. A quick glance through the annual reports of TCS and Wipro made us realize that the few resumes that we received could just be the tip of the iceberg. Much has changed since the glorious days of 2005, when every engineer in his last semester had a confirmed job offer from either TCS or Wipro or Infosys or Accenture. Revenue growth has stagnated, protectionism in US is forcing these companies to hire from US, and automation is making low level jobs redundant. Biggest risk is to the mid level employees, whose role could either shift to US or could be taken over by low cost junior employees with some help from automation.

While there are no easy answers as to “how can working professionals prepare for job losses”, the least we can do is to tell ourselves that gone are the days when a job can be considered to last forever. The next logical step would be to sync our spending & investing habits to this new reality. Living your present life based on earnings that will accrue to you in the future surely needs a second thought. Buying a house on loan is one of most prevalent ways of “living your present life on future earnings” and could prove to be your worst nightmare in case you were to lose your job. One should buy a house only after having saved enough money to purchase it without a huge loan. In case you have already bought a house on loan, don’t be in a hurry to prepay the loan. It’s the cheapest form of borrowing and you can use your surplus savings to invest in stocks rather than pre-paying the home loan.

Making systematic investments in equities is the best option for people between the age of 25 to 40. It gives a common man with limited savings a chance to participate in the vibrant Indian economy. Unlike real estate, stocks offer you the flexibility of getting out of a dying sector and getting in to an upcoming sector. Needless to say, stock markets are not without its share of risks. Refrain from making emotional decisions and make a systematic plan with a help of professional advisor.

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.