Memo 20 – 10,000 is just a number!

Marilyn Monroe, the sensation of 1960s, once famously said “if you can’t handle me at my worst, then you sure as hell don’t deserve me at my best”. I am forced to correlate this with the Indian stock markets – the folks who endured the worst (demonetization) phase are now enjoying the best times as far as their financial health is concerned. Stock markets have been making new highs every week and NIFTY, the benchmark index, crossed 10,000 for the first time in Indian history. The ironic part about this stock market rally is that not many are happy. The emotional backdrop of most of the retail folks we interact with can be classified into three major categories:

  • Disbelief that stock markets are going up despite so many problems in Indian economy,

  • Worried that Stock markets are at elevated levels and will certainly fall, and

  • Regret because of inadequate exposure to stocks and promising themselves to invest more the next time there is a fall in the market.

Our one line response to all of them is “Markets are at the highest point, but this is not the top”. Markets may take a pause or may correct a bit in the near term. But we will surely be at much higher levels in years to come and 10,000 will look like bottom rather than top. India is prospering and moving ahead and it will be a criminal waste of opportunity to stay away from stocks. To us, 10,000 is just a number. Don’t get carried away; follow a systematic plan and stay invested in the world’s most attractive stock market.

What are the Clear Trends that have Emerged?

India remains “an island of stability”: We have repeatedly highlighted that India’s macro position is very formidable and this will insulate us from external shocks to a large extentWe have achieved the holy trinity of low fiscal deficit, low current account deficit and low inflation despite the global turbulence. Probability of a sharp decline in the stock markets is low and intermittent volatility should be used to BUY.

Government has become a very active contributor to India story: India has come a long way from the  Manmohan Singh days of 2010-13 where we were mired in coal scam, 2G scam, CommonWealth games scam, chopper scam, etc. Today, we hear more about reforms like Housing for all by 2022, Electricity for all by 2018, Doubling of farmers’ income by 2022, NPA resolution, etc. While these reforms are in early stages of implementation, they will go a long way in helping India retain the tag of WORLD’S FASTEST GROWING ECONOMY. 

Don’t buy that dream house or pre-pay your home loan: 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. A sure shot way to ruin your financial health would be to buy a house on EMI. In case you have already bought a house on EMI, don’t make the mistake of prepaying the home loan.

Ignore Equities at your own risk: After having ignored stocks for decades, the average Indian is again coming back to the markets. Look at the massive inflows that are coming in the markets through mutual funds! This is just the start and we expect this juggernaut to continue over next ten years (only 3% of the networth of an average Indian is in stocks). Investing in stocks is not risky; in fact we will go so far to say that “not investing in stocks is very risky”.

Have reasonable expectations and stay invested: 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 understand that stock market is not a magic machine and the only people who get rewarded are those who have a systematic plan (remember Marilyn Monroe’s quote).

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 very negative on real estate prices).

Consumer sector remains replete with opportunities – Dairy, Plywood, gold loan NBFCs, kitchen products 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.

Trivia – Ordinary income, Extraordinary Wealth

Most of us spend disproportionate amount of time and energy towards increasing our salaries – we work for additional hours every day, put extra efforts on our deliverables, put up with uninteresting office get-to-gethers and even take part in office politics. So much is our involvement in our jobs that we have little energy or inclination for anything else. Thus, investments (especially equities) are low in the priority list of most hard working professionals. Below are two real life examples which will highlight the fact that “what you do with your salary” is probably more important than the “amount you earn through your salary”

  1. Samiksha passed out of her B-school in 2009 and started her career in a reputed MNC. She was smart, hard working and soon started making her way up the corporate ladder. It’s been eight years since she joined the MNC and now enjoys a plum CTC of Rs. 35 Lacs per year. Like most successful working professionals, Samiksha leads a good lifestyle and has never given a thought towards investing. All she has in the name of investment is a house in Gurgaon (of course on an EMI). Her networth including the house & bank FDs stand at Rs. 90 lacs.

  2. Ritu passed out of the same B-school in 2009 but ended up with a job in large technology company (often known as “mass recruiter”). Soon enough, she realized that she is just one of the 1000s of managers and her career progression isn’t going to be fast enough. Realization dawned upon her that she has to put her limited salary into smart use. She got in touch with an investment advisor and started investing in debt as well as equity investments from 2010 and abstained from buying a house. After spending eight years with the “mass recruiter”, her CTC is still only Rs. 22 lacs, much below that of Samiksha. But her investment amount of Rs 32 lacs in stocks has surged to Rs. 80 lacs and her networth is close to Rs 1.1 crores.

It is interesting that despite an ordinary job and a much lower salary, Ritu is financially better off than Samiksha. In fact the difference may get starker as Samiksha will spend a lot of her salary and bonuses in pre-paying the home loan and miss the potential gains that equity markets have to offer. 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.

 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 above to protect their identities.