What’s our market view?
Although discussing stocks is a far more interesting and conclusive activity than macro worrying, we are forced to indulge in the uninteresting part first. Macro environment has shown little signs of improvement since our last interaction – policy paralysis persists even as the overhang of presidential elections have subsided, inflation and fiscal deficit remain elevated, industrial growth continues to touch new lows, and currency fails to climb back above the Rs55/$ mark. Deficient rainfall has only added to the already gloomy list and we are headed for a drought like situation if the monsoon fails to pick-up in Aug-Sep.
There are only two remedies for a quick recovery from such a situation 1) Controlling fiscal deficit through curbing subsidies and taking bold measures like diesel price hike 2) Global meltdown in commodity prices. The first suggestion is completely implausible, especially given the possibility of drought and the impending elections in 2014. The second one is more of prayer rather than suggestion as the dynamics affecting commodity demand-supply are not in the hands of a single country. Commodity prices have failed to cool off meaningfully despite the European and Chinese slowdown, indicating tight supply situation. Thus, it is becoming increasingly clear that India’s economic slowdown will last longer than expected and suppress equity markets from breaking out of the trading range.
Which sectors/ themes do we like?
Once again, PSU Banks, Infra, metals, power and telecom are better avoided. And lastly, remember that real money is only made by buying and holding for really long periods.
Trivia – Aspirational inflation
While most of us are aware of demand-side and supply side inflation, we happened to meet an investor who introduced me to this new kind of inflation – aspirational inflation. It’s pretty simple to understand – our desire for better lifestyle, better gadgets, and better travel keeps on getting better with every passing day. A simple back-of-the envelope calculation suggests that inflation levels for our generation, more so for the ’empowered educated and working class’ is close to 25% and not the 9% that gets reported by the government.
The essence of this discussion is not to enumerate ways to curtail this aspirational inflation – this is something which is almost inevitable, especially when there are 40crore young people in the country with big dreams and aspirations. This discussion is intended to highlight the fact that most of us are faced with a situation where salaries go up by 15% and expenses go up by 25% every year. So it becomes extremely important to earn an expense adjusted return of ~12-14% just to maintain your current ‘inflation & aspiration adjusted financial position’ and there is no other place than equities to do this on a sustainable basis.
An apt example of what we are talking about is to compare the purchasing power of our fathers vs our own. Although they have toiled hard all their life, they could buy a house and raise a family happily even with abysmally low salaries. On the other hand, we are hardly able to manage better despite the much higher education and even higher salary levels. The only reason that we can comprehend is that we are living in an era of aspiration, while our fathers didn’t. And as most of you must have guessed, the one possible way to deal with this aspirational inflation is to buy businesses that benefit from this rise in aspiration. While a lot of you would feel that equities are risky, just calculate your networth (including gold, real estate and any possible inheritance) and see what proportion of your total networth is in ‘risky assets’. For most, this proportion won’t be more than 5% and you still feel your equity portfolio can make your financial health riskier!
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.