Is the current rally justified? India has not only recovered well from the Covid shock, but has also been able to capture benefits in the manufacturing sector arising out of the geopolitical war between China & US. Record number of new factories are coming up; record number of new trains, aircrafts, power & defence equipment are being ordered; record numbers high end homes, cars, airline tickets and hotel rooms are being booked. The banking system earned more than 300,000cr in profits in FY23 and is in best ever health in 15 years.

A closer look at various global markets also tells us that there is a noticeable difference between the market rally in India and that of developed countries like US, UK and Australia. The Indian markets have decisively crossed previous life time highs and marched ahead, while the other markets, although at 52-week highs, are still some distance away from previous life highs. Another big difference is that the rally in US (Nasdaq) is driven by only 7 or 8 large stocks. In India, the rally is very broad based, spread across 10’s of sectors and 100’s of stocks. All these are technical factors that point to the fact that Indian rally is stronger than its peers.

On the macro front too, there is one major difference between India & the developed economies – India has always lived with 6% inflation and 8% interest rates and grown despite that. On the
contrary, US & Europe have been addicted to low inflation & interest rates since early 2000s and the younger generation there is getting their first taste of elevated inflation & interest rates. In such an environment, India’s economic growth can significantly outshine other developed economies and attract decent FII flows for many years.

All the above factors lead us to conclude that the current rally is resting on solid foundation. Some of the internal risks are – uneven spread of monsoons, drastic climatic events and the possibility of adverse outcome during the 2024 national elections. Beyond these, the risks to Indian economy are
mostly external i.e. global volatility and commodity inflation.

Should one stay invested or book profits? The temptation to sell and book profits after an elongated market rally is generally high. It’s almost as if there is a subconscious fear that markets will crash and you will lose your profits. But before doing so, one must ask this question – In a growing country like India, is this the last time that markets will be at all-time highs? If we look at the history of our markets since 2008, the index has made new all-time highs on more than 500 of the 3750 trading days (Sensex has moved from 15,000 to 66,500).

There is high probability that such a pattern will repeat over the next 10 years as well, that Indian markets will keep marching forward as our economy keeps growing. Indian markets are not like
Japan or UK or Australia, where markets haven’t made lifetime highs in a few decades. The only kind of stock selling that makes sense right now is to get out of the frothy pockets, where share prices have gone far beyond the fundamentals. In the current context, some PSU stocks, SME stocks and low liquidity stocks fit the bill for booking profits.

Should one invest additional money at these elevated levels? We all are tempted to invest more money when the going is good, and hold back when the tide changes. While one should continue their regular investments, one can wait for a cool off period to deploy big capital. Do remember that there will be a flurry of negative news when market cools off – if you wish to time the markets, you should have the emotional grit to during such times.

Another point is that even in such markets, there are pockets of opportunities – certain new age companies, chemical & pharma sector, banks & NBFCs, manufacturing, dairy & real estate sectors fit the bill in the current context.

Trivia – Home (not so) sweet home!

Owning your house has been a universal dream from times immemorable. So intense is this desire that lakhs of Indians have pursued it over the last decade despite it being an economically sub- optimal decision (we have written many times over 2014-20 that the Indian real estate market was extremely over-valued and that renting is an economically better decision).

Residents in countries like US, Canada and UK were luckier – buying the house & making mortgage payments was more economical v/s renting. And thanks to the declining interest rates over last 20
years, housing prices have steadily increased and created lot of wealth for the home owners until 2022. Things seem to be changing since mid of 2022, as the 30yr mortgage rates have increased from 3% to 7%. The simple mathematics around income & mortgage payments suggests that housing prices in US need to decline by 40% in theory as explained below.

While an existing home owner in US continues his old mortgage at 3%, the new buyer will have to shell out 7% on his mortgage. That translates into an additional annual payment of US$30k for the
new buyer vs. the existing owner for a house costing US$1 million. To reach parity levels with existing owner, the new buyer needs to buy for US$600k i.e. a whopping ~40% discount! Of course, no one is going to sell their US$1 million house for US$600k since that would mean going back to 2012 prices. Hence, as it stands now, it’s upon the buyer to shell out a lot more for the same house. Not many would have the additional disposable incomes or the loan eligibility to do it. Thus, in the near term, the number of transactions in the housing market will start drying up.

If the interest rates stay high for longer, it is getting clear that either US housing prices will have to crash (less likely) or they will go into a decade long period of time correction (more likely). The same could be the case for US stock markets, given the peak margins, peak valuations, the tight labour markets, and the un-anchored inflation expectations. Most fund managers in US are looking to diversify their investments in emerging markets and India is the only market with size & depth! If foreigners are singing the Indian song, why should Indians be left behind!

Despite most of us having steadily moved up the economic ladder, we still wait for a mega sale to buy our cars & TVs, morning show to get a discount on pricey multiplex movies, off-season stay at Taj Hotels and, the “sabse sasta” day sale to buy grocery & fashion items (I was forced to spend a few hours in an overcrowded mall this Republic Day & this experience probably has a role to play in today’s memo). It’s only logical that this behaviour percolates into investments as well.

Breaking this urge to “time the investments” requires deep thought and training. Talking from my own experience, it took me six years (2004-10) of first-hand exposure to the stock markets to realize & internalize this myself. Therefore, while I continue to have more than 100% belief in the standard response that I used to give in the past on “timing the market”, I am going to attempt and give a different answer the question “Is this a good time to invest more money in the market?”

A lot of froth has cleared in the last 13 months!

In early 2022, there were many pockets of froth globally as well as in India. We are all well aware of the burst in crypto, global tech stocks, and Indian new age stocks! Memes like “Zomato is now cheaper than Tomato” or “2 share de do aur Nykaa ka lipstick le lo” or “Paytm karo par invest kabhi mat karo” describe the enormous wealth destruction in a lighter note.

Beyond these obvious pockets of euphoria, many lesser-known pockets of excesses have also been cleared. For example, pharma & chemical stocks like Divis, Laurus, Gland, Strides, Dr Lal, Deepak Nitrite etc have corrected up to 50% from top. Concept stocks like Dixon, Amber, IEX and IndiaMart too have come to more realistic levels. Even the high-quality stocks like Bajaj Finance, Dmart, Asian Paints, Dr Lal, Voltas, Whirlpool, Jubilant Foods and CDSL have seen considerable correction. And last but not the least, Adani group of stocks too have started correcting.

Collateral damage from Adani Group, if any, will be limited

Since this is currently the most talked about topic, it deserves a separate mention. Adani Group has acquired a lot of assets like ports, airports, gas stations, cement plants and electricity distribution rights over the last few years. In the process, it has accumulated debt to the tune of INR 2lac crores. Now, it is trying to deleverage its balance sheet by selling shares of one of the group companies.

Whether Adani is successful or not in the deleveraging endeavour, it doesn’t materially alter the overall trajectory of India’s economy or stock markets. This is because all Indian banks together have an exposure of less than 1lakh Cr to the Adani group and most of it is secured. Also, most mutual funds, PMS and investors have kept away from Adani stocks given the political risk involved. We find lot of similarities between Adani’s methods and that followed by Reliance & Birla’s in 80s & 90s or Korean giants like Samsung, LG and Hyundai in the last century.

Stable macro set-up; Budget can prove to be the turning point

Indian market was outperforming all the global markets until Dec’22, despite the constant FII selling. But since Jan’23, we have corrected a bit while the Chinese & European markets have done significantly better than us. Since India offers much better long-term stability & opportunity, there is a likelihood that once FIIs make money in China & Europe, they will come back to India. Also, it is a big relief for India that the oil, gas and metal prices have cooled-off since the Ukraine war.

Budget is usually a non-event for the markets, unless the government resorts to populist spending. The current government has made it clear multiple times, through their words & actions, that they would like to spend on infrastructure creation rather than distribute freebies. Experts who look at market technicals tell us that markets are very light before the budget (people are sitting on good cash levels) and any significant down move looks unlikely.

The banking sector is in fine fettle as can be seen by the good operating results posted by them and the optimistic commentaries about future. The infrastructure & industrial & energy sector is getting a lot of attention & resource allocation not just in India but globally as well. Companies in this space too are reporting good results and strong order books.

What can the investor do?

There is an old saying in investing that the best answer is never in terms of yes or no, but always in terms of probabilities. We are hoping that the above three paragraphs have done some justice to the possibilities of “is it a good time to invest more”!

One should not infer from the above analysis that there is absolutely no euphoria in the market. The pockets of euphoria (tech, startup, pharma, concept stocks etc) of 2020-21 may continue their downward journey for a few more quarters; the start-up balloon still has a long way to deflate; investors in the US stock markets may be disappointed for few more years; inflation will remain a factor to reckon with for a few more years. But the pertinent point is that many pockets of the Indian market are very healthy and investors in these pockets can expect decent returns over a period of time.

Trivia – Intelligence vs. Wisdom!

All of us have heard about the ills of gambling either from the ancient stories of Mahabharat or tale of Nala & Damayanti. The modern mathematicians too have highlighted the high probabilities of losing at the casinos in the famous quote “the house always wins”. Thanks to the cultural barriers & the awareness drives, large proportion of today’s educated youth do not indulge in traditional gambling. But like every other vice, traditional gambling evolved itself, re-packaged itself and caught the fancy of the youth in the recent years.

Yes, we are talking about the Futures & Option trading boom that gripped India since the start of pandemic! Crores of Indians opened trading & demat accounts on platforms like Zerodha, Angel, Upstox, etc. Most of them were lured by the low initial capital requirement and the “heads I don’t lose much, tails I win big” option strategies sold by the platforms and various influencers.

Anyone who has spent more than a decade in the stock markets, will know either from personal experience or from various study reports that majority of investors lose money in F&O. But looking at the frenzy, I consoled myself that maybe the educated younger generation is savvier & intelligent; that since the knowledge is easily available on internet via influencers & tutorials – they may not do as bad. However, a recent SEBI study highlighted that 95% of the ~40lac active traders suffered a net loss over the last 3 years and the average loss per person was 1.1lakh. The other 5% who made money, made a meagre 1.5lac on an average. Over the same time span, “the house” made handsome profits (Zerodha’s profits increased 4x to 2000cr, NSE’s profits increased 3x to 5000cr)!

This brings us to the debate between intelligence and wisdom. It is really easy to confuse the two. When you are young, intelligence generally ends up getting the better of you – reading success stories of few traders and attending few webinars make you feel that you can beat the house. The 14-year younger me could fully empathize with the enthusiasm & loss of the youth, but the slightly wiser me would think of two things – that these losses are “tuition fees” paid these youngsters to the markets for attaining some wisdom. And a wise investor should always invest with “the house”!

Large import of oil, gas, gold & electronics has been the primary reason for India’s negative trade balance i.e., our total imports have always been higher than total exports. Historically, this situation gets aggravated when foreign investors sell their India holdings in large quantities and remit money
back to their home country. Hence, we have always witnessed violent corrections in our stock market, currency market and interest rates during global turbulence (1998, 2000, 2008, 2013, 2020).

But this time around, Indian stocks, bonds and currency have been remarkably stable. That brings us two very logical questions – 1) Is this stability a temporary phenomenon & is there a big fall lurking? And 2) Is this something durable and signifies a permanent improvement in India’s outlook? While only time can answer these questions with certainty, the data points emanating over past few quarters point to the latter i.e. permanent improvement in India’s outlook. Let’s delve a little more into these to understand the opportunities that can arise and the safeguards that are needed, should the thesis not work out.

Observation 1: Stable geopolitical situation!

Globalization got fractured over last two years when US & Europe tried to weaponize its payment systems (SWIFT) against Russia, China tried to weaponize its manufacturing dominance, Russia tried to weaponize its energy dominance over Europe and so on. India has largely stayed neutral and offered itself as an alternative manufacturing destination to all the MNCs that are overly dependent on China or Europe for sourcing.

This offer has been backed with meticulous preparation like PLI schemes, tax incentives, reduced red tape, easier land acquisition, labour reforms, atmanirbhar criterion for PSUs, etc. It is getting clear that if the last decade belonged to consumer, banking & technology, the current decade may
witness a boom in India’s manufacturing economy.

Observation 2: Low leverage, large domestic economy, and booming software exports!

India’s financial system witnessed multiple rounds of clean-up just before COVID (De-mon, GST, IBC,IL&FS). Also, unlike the west, the Indian Government did not indulge in a massive spending spree during COVID. Hence, the financial health of our banks, corporates, and central government is very strong. Also, thanks to our blessed agri resources, we are not overly dependent on the world for food. The steadily growing software & engineering exports have so far managed to offset the oil imports bill. All these factors are big contributors to India’s macro stability. Flare up in oil prices probably remains the only big risk to India story.

What are the implications for investors?

The blessed part about investing in India is that there is a natural growth embedded in our economy,thanks to the captive consumption of the large population and rule of law. Our delivered growthrates may be lower or higher than our real potential, but we are surely growing. In such an economy, we don’t have to rely much on complicated macro assessment to guide our investment decisions. We need to find few good pockets of opportunities, few good promoters and stay invested till the thesis is intact.

While the evergreen themes like travel, fashion, food, finance, lifestyle, and technology continue to remain good areas to invest, one must start paying attention to the energy transition &
manufacturing theme. India is trying hard to reduce its oil import as well as meet emission targets through various strategies.

• Oil dependence can be reduced through ethanol blending, increased use of Electric and CNG vehicles. Creating infrastructure for these technologies would entail a lot of work for companies like Praj Industries, ISGEC, Alicon, Motherson Wire, Hitachi Energy, Ingersoll, Kirloskar Pneumatic, IGL, Techno Electric, Voltamp, BBL, Power Grid, etc.

• Factory operations can be made more energy efficient through use of advanced boiler technologies and better rated components like motors, pumps and compressors. Factory affluents can be treated in FGD or ZLD unit before being discharged. There are dozens of companies that work in these areas.

• If India can attract global players to manufacture in India, we will see a boom in construction of new factories. Most of the factories would require foundry, CNC machines, motors,pumps, compressors, bearings, steel, automation, logistic & warehousing services, etc.

Indian markets delivered ~11% CAGR over the last decade despite being plagued with scams & NPAs under the UPA; disruptive reforms like IBC, GST, NPCI under the NDA. We are now at a juncture where we will possibly enjoy the fruits of the pain taken over last decade. As such, long term investors can use globally induced corrections (there will be a few of them in the next twelve months) as opportunity to deploy more money.

Trivia – Corporate ESG v/s Personal ESG!

Environmental, Social, and Governance (ESG) has become a buzz word for nations, corporates, and investors over the last decade. So much that larger portion of company’s annual report or presentation is dedicated to ESG & CSR efforts in comparison to the business performance & initiatives. This talk is supplemented by the increased promotion of everything being clean, green, and responsible – clothes, cosmetics, energy, furniture, packaging, food, etc. The non-stop chanting may tempt you to believe that world is going in the right direction and mother earth has a chance to fight back.

The more we try to look beyond these clean and green claims, the more we realize that ESG is less about the environment and more about killing the guilt of excess consumption and spurring growth
for new industries like EV, Renewable, Home electronics, Fast Fashion, etc. The peak of ESG madness was revealed last month when one of our portfolio companies declared “we have sold a record number of pumps to biogas plants in Germany”. On further inquiry, we learnt that electricity generated from biogas has a high level of ESG compliance in Europe; the unfortunate part is that they are chopping off the forests to secure wood for these biogas plants!

The West has always paid lip service to environment & ecology. As India witnesses a manufacturing & consumption boom over the next decade, we hope we learn from our extant ancient ESG wisdom, most famously described by the two Sanskrit words “Vasudhaiva Kutumbakam” i.e. the whole world is a family. The ‘recycle’ part of ESG should hopefully generate a lot of interest in the coming decade. Currently, there are only a few companies that are into recycling of tyres, metal scrap, plastic bottles, car batteries and e-waste. If commodity prices stay high for long enough, this sector will see a lot of traction.

The reduce & reuse part of ESG is more of a personal choice for most of us. Just like the CEO of Fairphone mobiles once said, “the most sustainable phone available is the one you already own”, we too have a positive bias towards these aspects. Not owning an additional property, car, credit card,
memberships, etc has not only freed-up much of my mental bandwidth but also enhanced our health & wealth situation.

For long term investors like us, falling markets are time for mixed emotions. The fear of mark down in portfolio values is interspersed with hope of buying long-awaited stocks at attractive prices. But this time, the emotions are tilting more towards relief that falling markets will bring sanity back to the world of business & investing. Relief that focus is changing from “growth at any cost” to “growth with profits”; that speculative areas of the market like meme stocks, cryptos, unicorns, etc will get lesser attention; that every new company or IPO or tech start-up will not be touted as the next big disruptor.

One can ascribe various reasons for the market correction like inflation, tightening by US Fed, Ukraine war etc, but the most common reason for any stock market party to end is that the prices had run-up far ahead of business fundamentals. It is hardly surprising to see the poster boys of the pandemic party i.e. tech stocks, new-age companies, chemicals, cryptos, etc seeing the steepest fall. The point of this article is not to bash up these stocks & their investors but to see if this phase offers any insights or opportunities for the future.

Insight 1: Excesses never go unpunished!

It would have been impossible to imagine in Jun’20 that exciting companies like Zoom, Facebook, Shopify, ARKK Innovation etc, would end up giving lower returns than boring but stable companies like Nestle & Dabur. In India, similar value erosion has happened across many themes – new age stocks like Zomato, Cartrade, Nazara; narrative stocks like Neuland, Sequent, Solara etc; super expensive stocks like Bajaj Finance, CDSL, Dmart, Divis, Dr Lal; 2nd rung companies like Lux, IDFC Bank, etc. History is again trying to teach us the same lesson “what comes easily also goes away easily”

Insight 2: It is never all good or all bad!

It’s rarely the case that all pockets of the market are in bubble zone or in value zone at the same time. There are always pockets that one should be careful of and pockets that one can be optimistic about. In the Indian context, the bubble was in start-ups, new IPO listings, pharma, chemicals, commodities, electric vehicle & green energy related stories and many export-oriented stories. Correction has begun but it could still be some more time before they reach their fair values.

On the other hand, there is little euphoria in sectors like banking, auto & ancillary, durables, industrials, real estate, resources, etc. These spaces can do well once India’s informal economy recovers from the Covid shock. Sectors like home improvement, travel and fashion should continue to remain evergreen.

Insight 3: Inflation is here to stay, prepare for it!

In all our past articles, we have never spent much time on macro topics like inflation, currency, interest rates or money supply since all those indicators were benign. But something has structurally changed in the post-pandemic world which makes us believe that inflation deserves deeper attention. This time, inflation stems from demand as well as supply factors. On the demand side:

• The stimulus packages of the western economies have created excessive demand for electronics, cars, homes, home interiors, energy, etc. Also, the developing countries like India, Brazil, Vietnam etc, are fully opening up post pandemic and the postponed demand is coming back.

• China’s geopolitical dealings during COVID and US & Russia’s cold war-like behaviour recently have exposed the fault lines in global supply chains. Many countries will strive to have self-reliance in areas like food, energy & electronics and build factories, power plants and strategic storage reserves. This will consume a lot of resources.

On the supply side, the stickiness seems more glaring as it comes from deeply entrenched structural factors that have no immediate solution. Europe is facing record shortages for things as basic as gas & electricity. Below are some of the supply side reasons:

• The ESG focus & clean energy narrative ensured very little investments have been made in conventional areas of mining, oil & gas exploration, refining, blast furnaces, etc. Even if we decide to start investing, it takes years for these projects to start production (A copper mine takes at least 10 years from conception to first batch of production).

• China had a big role in controlling global inflation in the past 30 years. Government incentives, cheap labour and relaxed environmental regulations ensured that China supplied cheap goods to the whole world. But that is changing now, as labour costs in China are rising rapidly (thanks to one-child policy, the average youngster is much more affluent v/s their parents who worked long hours in factories). Also, as affluence in Chinese society is rising, they are demanding cleaner cities and the government is responding by tightening environmental laws.

For the sake of our environment, we too were hoping that the era of fossil fuels would soon come to an end. But the reality is that renewables contribute less than 5% of global energy needs as of today. Electric Vehicles contributed to only 3% of total cars sold in the US in 2021, remaining 97% will still need gasoline while they are on the road for at least a decade or so. Also, let’s not forget that the clean energy transition will need a hell lot of steel, aluminium, copper, cobalt, nickle, lithium, polysilicon, etc – all of which requires more mining and smelting activity.

Clearly, the world stopped investing in conventional sectors way ahead of time and there is little option but to revive some of these investments. Stocks in these sectors are cheap and could get a fresh bout of life. Another consequence of high inflation could be that many consumer facing companies will not do as well in this decade as they did in the previous decade.

Trivia – Normal inflation vs aspirational inflation!

In a growing country like India, inflation has always been around, like the background music in a restaurant – you won’t notice it unless it’s too loud. Our folks will occasionally whine about rising prices of tomatoes, Amul butter, petrol, etc (can’t resist mentioning the scene from 3 idiots at Raju’s place) but it hardly affects their or our consumption patterns. Our earlier generations hedged themselves against inflation by buying physical assets like gold, house or land and it worked well for them (until 2014). Unfortunately, it’s not so straightforward for our generation to ape this.

Firstly, land & residential housing is still over-valued in most of the cities and may not deliver 6-8% returns. Secondly, the inflation rate for the young affluent class is at least 2-4% higher than the 6-8% rate published by RBI, courtesy the subconscious aspiration to keep upgrading our lifestyles. We have all witnessed this from close quarters – brand domination in bathroom shelves has changed from HUL to Body Shop to Forest Essential; wardrobes have changed from Fashion Street/Chandni Chowk to FabIndia & Zara; cars have changed from Maruti to Morrison Garages; healthcare has shifted from local doctor to Metropolis or Max or Apollo; vacations have evolved from native place to Taj & Airbnb.

A striking feature of this “aspirational inflation” is that it is extremely persistent till we reach our 50s. Very few can break-out of the cycle of aspirational inflation, so it’s best to acknowledge it and plan for it. An elderly investor enlightened us in 2014 that one need not be scared of aspirational inflation, rather it can be the best hunting ground for ideas for long term investing. We wrote about this in our 2014 article. Between then and now, stocks of more than a dozen companies that provide better housing, food, fashion, vacation, etc have given higher returns than the aspirational inflation number!

]]> http://greenedgewealth.com/memo-33-heads-i-win-tails-i-dont-lose-much/ Thu, 11 Nov 2021 05:34:12 +0000 http://greenedgewealth.com/?p=1378 Memo 33 – Heads, I win; Tails, I don’t lose much!
The above title pretty much summarises the investor experience in stock markets over past 18 months. Markets continue to celebrate even the smallest of positive developments like revenge travel, re-opening of cinemas or the rise in valuation of start-up unicorns. Business media, Twitter & Instagram are full of positive interpretation even around the not-so-positive developments like:

• Rising inflation (is good because farmers & miners will earn more!)
• Slow recovery in unemployment (people are enjoying life & not returning to work!)
• Slowing down of Chinese economy (China’s loss is India’s gain!)
• Staggering debt levels of global central banks (why should I care when I have no debt!)
• Record IPO valuations of loss-making unicorns (but India’s getting its own FAANG brands!)

So easy has it been to make money in stock markets post Apr’20 that new investors have been flocking there in hordes. A case in point is the small town called Barpeta in Assam, which managed to open more trading accounts than Hyderabad and even Ahmedabad! Many of the newbie investors have witnessed long streak of winning trades and that has encouraged them to start their technical trading & investment advisory business on whatsapp, twitter, youtube, telegram, etc.

It’s a different matter that Barpeta folks have been lured with prospect of making 3000 to 5000 rupees every day on a capital investment of merely 50,000 and that strategies of some of these new breeds of advisors have been back-tested for only 3-5% market falls. The purpose of this article is not to worry about the investors of Barpeta or new breed of advisors or their followers. Time will ensure that everyone will learn the right lessons. The purpose is to re-access some of our actions, assumptions and expectations even as we celebrate the current phase of positivity.

Is the current phase of positivity unjustified?

A black or white answer to the above question is not only difficult but also futile for long term investors like us. The markets and economy are always a concoction of positive & negative things. Currently, the pace of vaccination, absence of 3rd wave, boom in start-up & tech sector, revival in corporate profits, record tax collection, opening-up of economy, etc can be seen as positives. On the other side, weak informal economy, unemployment at 2x of pre-covid levels, muted 2-wheeler & car sales, supply chain constraints, inflation, possibility of stagflation, etc can be seen as negatives. And each of these things are constantly evolving!

Thankfully, long term investing does not require us to have accurate views on any of the above. Investing can be as simple as buying a good business at a good price. Over the past 18 months, prices of large number of stocks have risen significantly; in many cases, prices have gone up way more than profit growth & future potential of those companies. Hence, it may be prudent to trim exposure to over-priced stocks in our portfolios. High prices can be strong enough a reason for the party to end! We have seen that happen in the Japanese real estate market in early ‘90s, the dot-com burst in ‘99, the Sensex story of 2010-13 and more recently in a stock called IRCTC.

Are there pockets of euphoria that one must stay away from?

While there is no clear definition as to what constitutes “euphoria”, there are a few common patterns observed in most bubbles – the stock or sector is seeing sudden surge in profits, most likely due to inventory gains; these high operating margins are expected to sustain in the future or; businesses are loss making today but valued based on abstract ideas like large addressable market, earnings potential of 2030; or stocks are touted as India’s Paypal/Netflix/Alibaba or even next HDFC/Titan.

Currently, we are seeing such signs in companies belonging to sectors such as specialty chemicals, pharma, green energy, building materials, tech-platform (Zomato, Paytm, Policybazzar, Nazara, Indiamart, etc) and not to forget Cryptocurrencies! Some of them may be good business models, but surely, they have run ahead of their fundamentals and need to rest.

An analysis of Paytm (weak business model, very high price)

After a failed wallet & e-commerce business, Paytm has now focused its energies towards the loss-making payments business. Paytm is still burning crores to acquire merchants as well as retail customers and ensure that people use their platform to make payments, in the hope that someday, Paytm can cross sell loan, investment and insurance products to this large customer base. Thus, for all the big buzz words like superapp, network effects, wealth-tech, insurtech, Paytm is going be an “agent” in the future that earns commissions out of selling loans, mutual funds, insurance, etc!

They claim to be the (Paypal + Alipay) of India. But in reality, Paytm is not even a shadow of these profitable giants, nor can it dream of getting there in the future. Alipay was built on success of Alibaba, the Chinese e-commerce giant while Paypal flourished due to friction in online & international payments for US e-commerce customers. Paytm lacks a strong parent like Alibaba that can give assured business and India’s payment system is very robust and “for free” due to the brilliantly designed UPI. Paytm tried the Alipay model through Paytm Mall, but that failed miserably.

Currently, there are no strong use cases for a Paytm user either. Though Paytm provides all facilities in its superapp, most of the customers don’t use them. May be because India has strong players in each of the large online segments – MakeMyTrip & IRCTC for travel, Swiggy & Amazon for delivery, I-Direct & Zerodha for stocks, HDFC Payzap for Banking, etc. It is hardly surprising that Paytm never discloses metrics as basic as “people who use Paytm more than once a month” and “people who use paytm for two or more products”, which can give us some idea on customers stickiness on the Paytm app.

Paytm with combined losses in excess of 10,000crs, is asking for valuation of Rs. 150,000crs, which is similar to that of Axis Bank which has 10,000cr of sustainable profits, lacs of crores of loans and thousands of crores of mutual funds & insurance already distributed. The media articles too talk only about funding raised from big investors and never a thing about the relevant business parameters. And the salt on the wound is that Softbank & Alibaba are going to be the largest sellers in the IPO!

An analysis of Zomato (average business model, very high price)

We couldn’t imagine life during Covid lockdowns without Swiggy & Zomato. They have become synonymous with home delivery of restaurant food. It’s true that food delivery will remain a fast-growing area for many years and enable double digit growth for Zomato. But to keep value conscious Indian hooked to its online ordering app, Zomato will have to constantly provide attractive discounts & rewards i.e. keep burning cash to keep consumers from moving to competitors.

Discounts, rewards & geographic expansion have resulted in losses of Rs. 4000crs over last three years for Zomato. Swiggy, its main rival, too has deep pockets and similar ability to keep burning cash. There are no signs that the losses may go away magically in coming future. Restaurants have a love/hate relationship with Zomato, since they have to share 15-20% of their revenue with Zomato and are yet unable to get access to customer data.

In US, we have seen large as well as local restaurants coming together and creating common app & delivery in response to high handed practices of food aggregators. More recently, Chinese government woke up to the woes of delivery staff and that has substantially increased employees’ costs for Chinese food delivery operators. It seems that growth prospects and challenges, both are equally balanced. Hence, valuing Zomato at 100,000cr today itself seems very aggressive to us.

An analysis of Nykaa (strong business model, very high price)

Nykaa seems to be doing lot of things well. They have built a credible platform which is helping expand the depth & breadth of India’s beauty market. Its ecosystem of product discovery & delivery is attracting all the important stakeholders of the beauty ecosystem on its platform – the best beauty bloggers & influencers work with them, who in turn created more content and brought more traffic, which deepened customer engagement. This in turn attracted local & global beauty brands to list their products on Nykaa, further increasing the product basket and the virtuous cycle.

Versus Zomato, Nykaa doesn’t burn billions to generate its revenue. In fact, it is among the rare breed of start-ups with an eye on profits. Large Global & small local brands like Estee Lauder, Innisfree, HUL, Minimalist etc view Nykaa as an enabler for their business and not a threat. Nykaa has truly created an ecosystem where interest of all its stakeholders is aligned. The IPO was reasonably priced but the listing price already captures few years of good execution.

Don’t buy steel at the price of gold!

Everyone is searching for the next Google or Amazon or Tesla and accordingly creating narratives around the new IPOs. Some investors claim that traditional methods won’t work for evaluating these new age companies! But we would like to stick to our understanding that sooner or later, every start-up will be evaluated on its ability to generate sustainable profits.

What should we as investors do?

The task for any investor after 18 months of rally is quite simple – ensure that your portfolio does not have large allocation towards stocks that are in the euphoria zone. There is very little euphoria in gold and sectors like banking, NBFCs, auto & ancillaries, consumer staples because they are dependent on India’s informal economy, which is still struggling.

Covid & the subsequent market rally have proved to be a financial bonanza for the rich & white collared middle class. They have now started spending money on life-style, travel, shopping, etc. The money spent will eventually reach the informal economy (drivers, maids, mall workers, tour operators, event workers etc) and ensure that the sectors that are out of flavour today, will come in flavour next year. We are cautious on the large gains made in the short amount of time but are very excited about the long-term journey of the Indian economy & the stock market.

Trivia – the charm of freebies!

Cinemas in Maharashtra opened on 22nd Oct and INOX announced free tickets for its morning show. Tired of Netflix & Zomato deliveries, I was fully determined to make the most of this opportunity. After spending 30 mins on the booking site with multiple attempts and multiple glitches, I was about to give up. Just then, it struck me that if I order some food, INOX will at least earn some revenue and will probably allow me to book tickets – and lo, it gave me the booking immediately. The cinematic experience was amazing but I had to gulp down the pop-corn & Coke during the intermission, that too early in the morning! It’s during those moments that I re-realized for the nth time that nothing is really free and chose to make it the trivia topic for this article ?

Even in the world of finance, we are surrounded with freebies – Zero brokerage, life time free DEMAT account, interest free EMI option on online shopping, free investment advice from your banker+broker or even Quora & Insta. Some apps like CRED & Upstox go even a step further and reward you for using their platform. No marks for guessing that each of these freebies has hidden agendas and indirect costs.

If you are a HDFC Bank customer, chances are high that you would have a relationship manager (RM) who would advise you for free and try to sell you mutual funds & insurance. The bank doesn’t charge you at all but earns commission from the product provider. It will surprise you to know that HDFC Bank earned more than Rs. 3,000cr last year from such commissions. There would be no one to complain if the products sold by the RM were suitable for the client. But more often than not, the bank RM is incentivised to sell you the products that have highest commissions. After few months, the RM would move on and you would be left with an inappropriate product.

If you trade through Zerodha, Angel or Upstox, you would realize how the whole ecosystem is designed to make you trade more. The more you trade, the more margin you will keep in your account. Apart from the Rs. 20 that they charge you, they also earn some money on the unutilized margin you keep in your account (there were rumours that Zerodha earned tens of crores on this unutilized margin money in 2019). In the 350-year-old history of stock markets, it has been proved multiple times that investors who trade frequently eventually tend to lose the game.

When you use the Zero EMI or Buy Now, Pay Later schemes on e-commerce portals, not only do you share unlimited personal data, you may also end up upgrading the phone or TV by 1 or 2 notches, which tantamounts to over-spending. While we have always shared our critical data with our banks, these were highly regulated entities. That’s clearly not the case with the 100s of internet companies that want our data. With that, it’s clear, there is no free lunch and you are paying for that free service one way or the other.

A complete victory over Covid seems at least a few months away, but that has not stopped the stock markets from making new highs yet again. The 2 nd wave made little dent on the markets even though it had much deeper impact on lives & livelihood of large number of Indians. The divergence seems even stronger when we see that unemployment rate in India is stubbornly high but most start-ups are facing unprecedented attrition as well as wage inflation! Let’s have a slightly deeper look at the construct of Indian economy & the stock market to understand this a little better.

GDP & stock market can be very divergent: Stock indices are 35% higher than the highest levels seen in 2019 despite the consensus that Indian GDP will surpass the FY19 levels only in FY23. This divergence is because few large but suffering sectors of the economy like government services, agriculture and the unorganized sector i.e., MSME, have low representation in the stock indices. On the other hand, winning companies like Reliance & HDFC twins constitute approximately 28% of NIFTY 50 even if their GDP contribution would barely exceed 5%. Thus, GDP performance can remain
divergent from market performance.

Pockets of “Party” are for real: While the healthcare, tech & delivery-based economy is clearly witnessing unprecedented boom times, a few more sectors are witnessing good times – the producers & processors of commodities like metals, sugar, paper, textiles, electronic component
manufacturers and factory upgradation equipment! These old economy sectors went through very long period of pain over 2012-2020 and lot of weak players were wiped out, ending up in a serious capacity constraint, in case the demand surged. Now that demand from developed economies like China & US has bounced back, these sectors are witnessing tremendous uptick in the selling prices of their products.

Pockets of “pain” are for real: This list is probably longer with restaurants, cinemas, malls, airlines, resorts, theme parks, laundry ecosystem, taxi/auto services, office space owners, vehicle manufacturers, event management, fashion & beauty companies, loan companies, FD investor, and last but not the least, the low skilled labourers who cannot work from home.

The white collared middle class isn’t in pain and probably celebrating because of no salary cuts, lower living expenses in Covid and gains from stock investments. But the much larger, blue collared middle class & informal economy, is definitely under pain. As an illustration, India’s finest mass premium brands in innerwear, footwear and luggage segments i.e., Jockey, Bata and VIP Bags are all witnessing high degree of downtrading i.e., people switching to products or brands at lower price points.

Mean reversion of “pockets” is also inevitable: It will be very simplistic to assume that the winners will continue to win and the losers will continue to lose. Once the fear of Covid subsides, the affluent class will desire to step out to watch a movie on the big screen; eat piping hot food at their favourite restaurant rather than the Zomato’s hot/cold food eaten in front of Netflix screen; visit a mall for retail therapy, play outdoor games, and finally go on their long awaited domestic and international trip! Once the fear of income uncertainty reduces, the non-affluent class too will start spending on the things beyond basic necessities. That would probably be the time when the current winners will rest and the current losers will try to shine.

Markets & investing – simple but not easy!

The beauty about stock markets is that it definitely rewards the patient long term investor but it is
impossible to get the short term correct, no matter how hard you try or how intelligent you are.More than 500 stocks declined by more than 50% in the Covid fall of Mar-Apr20. Had someone asked us for our view then, we would have surmised that only the 100 best companies out of these 500 would bounce back, that too by 2022. And look at where the markets are today. Approximately 800 stocks have more than doubled i.e., 2x, 3x, 5x and majority of them have even comfortably crossed the pre-Covid highs.

Thankfully, investing isn’t about getting these short-term trends right. It is more about finding a few
good businesses that can do well over the years, holding them dear, and avoiding the ones that will
destroy wealth over time. It is more about having a disciplined approach to investing rather than
succumbing to the volatilities of the human mind.

Currently, there are numerous pockets of excessive optimism and excessive pessimism in the market. One can be reasonably sure that over years, you will earn sub-optimal returns in the 1 st basket and make decent returns in the 2 nd basket. As long-term investors, we have learnt not to worry about when or how much will the markets fall in the coming months but rather focus on having low exposure to the 1 st basket and high exposure to the 2 nd basket.

Trivia – New age investing!

As recent as 2007, if you wanted to invest in stock markets, you needed to have some “contact” in the broking industry who would help you open an account, execute your trades and even advise you. We recall our days at B-School when we helped dozen odd batchmates open their first ever trading account with a broker (it’s a different story that their first investment happened in Reliance Power IPO, the Sub-prime crisis hit and many of them never traded after that ).

Fast forward to 2021, you can open an account by clicking few buttons. It will need fewer clicks to buy & sell stocks, F&O, apply for IPO, invest in cryptos, etc! And the icing on cake is that a hell lot of advice is available online and all this is for free. The barriers to investing have substantially reduced and the same is corroborated by the millions of new self-investors joining the party. The only problem is that the barriers to excellence in investing continue to remain extremely high. Sooner or later, every do-it-yourself investor will have to go through a pain period that will test their grit.

Some batchmates who entered the market during 2008 and saw only losses for eighteen months may have got the wrong impression about equity investing. But some of them stayed invested, went through their own learning journey and can now boast about their sizeable investment portfolios. For those who have entered the markets in the past 18 months, profit is the only word in their lexicon. They would probably have outperformed professional money managers too. Many of these investors too will go through their share of lessons and some of them will eventually cross the barriers to excellence.

The roller coaster of 2020 is resolutely behind us – Covid concerns are fading, life is bouncing back
towards normalcy, our favourite restaurants & our household help are back in action, government &central banks are providing unconditional support to the economy and, stock markets are at least
20% higher than pre-Covid levels! One may be seduced to think that it’s surely a party time for investors. Well, life is never so simple and we are seeing mixed investor emotions around us. We
encountered below personalities in last 1 year:

The never again investor! The 25-30% fall in Mar’20 scared the hell out of this investor and they liquidated their stocks as soon as they reached break-even levels. It is highly likely that this investor will never come back.

The “bubble” investor! This category of investor is often well read, but falls easily for negative news. Their biggest rant is “economy is under so much stress but markets are going up, it is surely a bubble” and they sold out too early.

The bold & beautiful! Majority of them started their stock market journey in the last one or two years. Majority of them haven’t crossed their 30 th Birthday. They like to believe in stories, and have no fear in buying companies with little earnings; companies with questionable business models as long as they feel it’s the “next big tech” company. Bitcoins and Teslas of the world are their biggest inspiration. Their performance of past 12 months will put seasoned fund managers to shame.

Mature but sometimes miserable! They have some understanding about risk & rewards, their time horizons are long and they majorly own good quality stocks in their portfolio. Their wealth too has soared in this rally, but they get bouts of misery because their stocks haven’t done as well as the Bitcoins & Teslas of the world.

To summarize, those who didn’t buy in the fall are sitting in regret, those who bought in the fall but
sold early are also sitting in regret and those of bought & continue to hold are also somewhat in
regret because “stocks they didn’t own” have done better. This investor behaviour opens doors to some enriching insights:

Insight 1: Markets are volatile, accept it and don’t try to time it

Explanation 1: If you entered the market for some excitement or making quick buck, the COVID fall and the subsequent rise would have caused a lot of anxiety. And it’s never easy to take good
decisions when under the influence of anxiety. However, if you invest in equities to protect your wealth from ill-effects of inflation and grow it at a reasonable rate over the long term, you will likely experience lesser anxiety in bad times.

Insight 2: Average for a very long time is above average

Explanation 2: There is always some stock or some peer or some fund that is going to do better than you at a given point in time. The availability of information makes this problem worse and makes you feel that you were at striking distance of investing in the most popular stocks but missed it. It’s easy to feel miserable about what you own. The only way to overcome this is to remember your starting goal i.e. you started your investing journey to earn reasonable returns for a long time.

Economy & markets – high on hope & recovery

Stock Markets are clearly celebrating three things – that Covid pandemic was much milder than earlier predictions, that government & central banks across the world will continue the unprecedented support to economy and that the crisis will force economic reforms at faster rate. However, the market rise should not be confused with the economy.

While many pockets of economy have bounced back completely, sectors like fashion, aviation, cinemas, sports, films, hospitality, travel, retail, and commercial real estate have a long road ahead. However, one trend is clear across the sectors i.e. strong companies are getting stronger. And it is only the strongest of the companies that are listed on the stock markets.

This is not to say that the party will continue forever. There is definitely some pain in mid & small sized companies and will surface once the macro conditions start tightening. It is extremely
important that you weed out the doubtful pockets and have minimum exposure to pockets of euphoria, because that is where you may lose a lot of money when the music stops.

From a longer term perspective, it seems that India will finally return to double digit growth rates.
India will probably see massive investments in infrastructure, automation and technology. Apart from the usual consumption themes, the above sectors can see sustainable action.

Trivia – Doing well and still miserable!

We were caught off-guard when one of our investors asked for views on a little known gaming company called GameStock. Over the next few days it became a discussion point in even those whatsapp groups where discussing stocks was the 20 th priority. The power of social media made everyone feel left out – that they missed out owning GameStock as its share rose from $20 to $400 in a single week. It’s a different matter that the stock had poor fundamentals and has corrected to $40 and more than 90% of the new investors have lost money.

The bigger point is that information overload has the power to make you miserable even if you are doing reasonably well in life or investing. As an illustration, internet give us insights into daily life of our favourite celebrities – how they exercise, what they eat, what they wear, how they raise their kids, how they party, how they vacation, etc. Suddenly, we don’t compare ourselves to Suresh who stays next door or Ramesh who sits in the next cubical or Anita who is a mid-age working mother! We start comparing ourselves with Milind Soman or Kareena Kapoor!

Nothing wrong in comparing ourselves with our ideals and trying to live like them. The only thing we
need to be aware is what opens doors to infinite happiness also opens the doors to infinite misery.
And an unaware mind will easily chose misery over happiness.

But clearly, we are better prepared and slightly wiser too – we know that social distancing works, recovery rates are very high, medical infrastructure is getting better, governments have been supportive of the economy, and that our real household expenses are a fraction of pre-Covid days. If we all pledge to curtail the consumption of news & non-stop information bombardment, the next 100 days look more hopeful.

Economy & Markets – Mixture of hope & confusion

The sharp fall in global stock markets in March was due to uncertainty around human life and the sharp rebound in the subsequent 100 days is to celebrate the fact that most of us will be alive and even return to normalcy in near future. Another factor that has come to market’s aid is the large liquidity intervention by central banks around the world. Hence, the rise in stock markets should not be confused with the country’s economic performance. The pain in the economy is hidden for now, thanks to the moratoriums on debt payments and can manifest in coming quarters.

As an illustration, take the example of Jaideep, a pilot with a reputed airline and subjected to 50% reduction in salary. He cancelled the booking of his 3 BHK apartment with a Pune based developer. Since there are many more Jaideeps across India, the developer may be staring at a large number of cancellations. The developer in turn has slowed down the construction work, delayed payments to its construction contractor and is negotiating with the bank for elongated repayment terms. Thus, the suffering of airlines industry is passed on to sectors like real estate, banking, cement, construction, interiors, etc.

Thus, two things become clear – the economy will take a year or more to absorb the shock and bounce back. But the Governments & Central banks will continue to support the financial system so that there will be no systemic shocks. This can provide a floor to markets and investors can adopt a stock specific approach.

Your investments – some areas of clarity

Too early to jump into new trends: We are always excited by new trends & recent happenings. The recent excitement is around which companies will benefit due to work from home theme (technology or real estate?); from the need to continue social distancing (Automobiles sector?); from need for home deliveries (last mile logistics companies?). However, these are early days and trends are not clear. For illustration, if you have to permanently work from home, wouldn’t you want to buy a bigger house? But work from home might also mean lower future salaries and buying a bigger house would mean higher EMIs.

Focus on things that won’t change: Maybe it’s time to focus on things that will not change – clearly, the need to eat & live better (food & health sector); the need for entertainment (gaming, drinking, smoking, socializing) and the need for financial services (insurance, investments, borrowing) is here to stay. Even while investing in such sectors, never forget the basic rule – companies with the highest chance of survival are the ones with strong balance sheets, leadership position in their micro-market, track record for innovation and customer satisfaction of its customers.

Sticking to your long term plan: It is easy to get excited or scared by happenings in the near term. In fact, the near term is highly overrated. This is despite the numerous ancient stories that enlighten us about success, that it is a result of consistent efforts over long periods and not a random impulse decision. Ignore the short term noises and continue to have a balanced asset allocation across cash, fixed income instruments, gold and stocks.

Trivia – A little bit of everything!

“A little bit of everything has never killed anybody” – the last 100 days re-iterated this age old saying through the story of Aparna, a diligent investor. We call her diligent because she has adhered to her asset allocation plan to the last decimal point. Her portfolio is a healthy mix of equities (stocks, MFs, ETFs), fixed income (FDs, Govt bonds, corporate bonds, ETFs and REITs) and gold (digital, physical).

During the market meltdown in March’20, her equity portfolio lost 20% of its value. Though she was not surprised by that, she was a bit surprised to see that her bonds too had lost 5-15% of their value. But she was most surprised when rumours started floating around that private banks like IndusInd & RBL may face problems. She even enquired if her FDs with ICICI Bank were safe!

That was the first time in last two years that FDs seemed like a god-sent instrument and no one would complaint about the low returns. Beyond FDs, Aparna’s portfolio had gold bonds, which gave her further relief as gold prices in India rallied to an all time high. Thanks to her adherence to the diversified asset allocation plan, her financial anxiety levels were low even during the worst period of Mar-April’20. The worst is clearly behind and stocks & bonds have rallied significantly since the March lows. But the age old wisdom got re-iterated yet again i.e. do not put all your eggs in one basket.

Feel free to reach out in case you need professional help with your investments!

P.S:

1. 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.

2. Names of individuals mentioned above have been changed to protect their identities.

Based on our individual personalities, some people will see this event with huge anxiety while some others may see it as an opportunity. Both of them need to take a deep breath first! While we do believe that “this too shall pass”, it is always helpful to take a balanced approach.

Is it time to make fresh investments?

It may be tempting to take advantage of the lower stock prices today. Once the positive outcome in humanity’s fight against Corona (vaccine or natural slowdown) comes into action, we will see a sharp rebound in both economy & stocks. But if the fight lasts longer, it may take a year or two before you see meaningful revival in your investments. Before investing in stocks, make sure you are clear with the three conditions below:

1) Expense buffer – You need to keep 90-180 days of expenditure in your bank account (cash/FD) so that you are comfortable even if virus related lock downs last for six months.

2) Asset allocation – You need to ensure that your financial wealth is spread across asset classes like FDs, Bonds, Stocks and Gold. We have time and again discussed the perils of putting all eggs in one basket. Please get your asset allocation aligned as per your risk profile. Feel free to reach out to us if you need help with this

3) Time frame – Invest only that money in stocks incrementally, which you may not need for next 5 years. It is possible that stocks can fall further even from current levels!

What will happen to the existing investments?

Most of the stocks have declined 30-40% in this fall as investors rush to raise cash. In such situations, markets make no distinction between good & not so good companies. Below is a guide on some common questions:

1) Wasn’t it possible to predict the fall and sell everything before the fall?

Investing is about finding right opportunities and not about making accurate forecasts. Nor do most investors have any special abilities to forecast a sudden crash. The best of investors have always focused on identifying great companies and holding them for many years.

2) Should one sell everything today, so that we can protect future downside?

If you do not have enough buffer to tide over next 3-6 months of expenses or if your salary continuity is at risk, you may have to take out some money. Otherwise, you may just be better off waiting out and riding the recovery as and when it happens.

Another way to think about this is to assume that property prices too have fallen 10-25%. Do we consider selling our house or our shop? Of course not, because we have a long term view here. And we cannot sell it immediately even if we want to due to lack of liquidity. The ability to sell stocks instantly is both a boon & curse.

3) Some insights on reviewing your investments

Never waste a good crisis. Use this time to understand few parameters about your invested companies: a strong balance sheet; interdependence on global trades; leadership position in their micro-market; innovation track record and satisfaction of its customers.

When the dust settles, people will still eat out, drink, shop, socialize and travel. Companies with most of the above characteristics are best placed to weather the impending slowdown and recover from it.

Trivia – Money & Well being

A lot of us spend more than 50% of our day on either earning money or worrying about money or even worse, quarrelling over money. The virus scare can create further anxiety but it also opens doors for newer aspects in life. The other day, I was speaking to a fellow investor who has been in the stock markets for over thirty years. Being true to my expectations, he was much calmer and visibly less perturbed by the market fall and Corona scare.

He started off by saying that he read a lot of positive news in the past two weeks – the drop in global travel and lock downs in many countries has resulted in significantly lower pollution. So much, that dolphins have been spotted in canals of Italy after many years! Further, he suggested there is no need to get worried if you have followed the below rules:

1) Differentiate between “needs” and “desires”

Categorize your expenses into what you absolutely need and what is good to have (but not essential). This will help in arriving at the minimal amount required to maintain a lifestyle. After doing this, most of us will realize that we are in a better financial position than we think. The virus scare may actually give you chance to save some money which would have otherwise been spent on travel, vacations, movies and fine dines.

2) Stress test your finances

Most of us are so busy in our day to day lives that we never get chance to look at our wealth in a holistic manner. We can use this spare time to ponder over these questions:

· Do we have adequate health & life insurance?
· Do we have enough buffer fund (FDs, gold) to last us for 12 months of bad times?
· Do we have a long term financial plan?

These are indeed testing times, but also offer “time” for personal, emotional, social and financial development. Let’s hope that in a few months from now, people will talk more about Corona beer than the virus.

Feel free to reach out in case you need professional help with 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.

There is lot of bad news around the stock markets & the economy. However, this can itself create some good news – that you can go out and get a large discount on practically anything – stocks, bonds, homes, offices, cars, bikes, clothes, etc.

Economic slowdown – Fifteen months and still counting

It’s been fifteen long months since the economic slowdown started and it has only intensified across sectors – electricity, real estate, cars, bikes, trucks, etc. As of now, it looks like an unwanted guest that will stay for few more quarters.

What caused the slowdown? Confluence of multiple reforms like demonetization, GST, stronger compliances impacted the old economy companies & old ways of doing business. Most of them had loans from banks & NBFCs and started defaulting. This in-turn started having a spiral impact on India’s financial system, which was anyways reeling under NPA problems. No economy can perform when its financial system isn’t ready to lend.

How long will the slowdown last? This turbulent phase is turning out to be so long drawn that many iconic companies & brands like Yes Bank, DHFL, Reliance Capital, Sintex, Eveready, CCD, Zee, Emami, Crompton, Vodafone, Idea, Karvy, Talwalkars, etc have fallen from grace. Not that they were the best managed companies, but these were well known consumer brands. Time & government are the best healers for any financial system when trust deficit is high. While the government is trying multiple things, it’s rather slow and will take a few quarters before things normalize.

Stock market slowdown – Two years and counting

Struggle for most: It’s been almost two years that stock markets have been struggling. Most investors have experienced negative returns over this period. NIFTY & SENSEX, the index of top 50 companies, however, do not reflect this pain. This is because few large companies have been able to do well despite slowdown and their stock prices have done well. Such a narrow market is a sign of the low trust that investors have on the broad economy and smaller companies.

Are there any green shoots? The slowdown doesn’t impact everyone in the same manner. Most well run companies are still showing decent growth by gaining market share from the weak players. For example, DMART is doing well but Future Group is struggling; Tanishq is doing well but majority of jewellery industry is struggling; Indigo is doing well but other airlines are struggling; CERA is fine but its competitors are under severe stress. These trends represent opportunity for investors.

What can you do?

Prices are attractive, be ready for shopping: When there is slowdown, no one wants to buy anything. Hence, the prices across asset classes become attractive. There are some government bonds that will yield 7% post-tax; some corporate bonds & debt mutual funds that will yield you 11%; lot of stocks that offer 12-15% growth opportunity. But all of this will require a long holding period as we wade through next few months of slow economy.

Have a systematic plan: We all make mistakes in good times but slowdown is usually the time to introspect and improve over our past mistakes. For some the mistake could be over-allocation to stocks; for others, it could be under-allocation. Some may have parked lot of money in “not a well run bank”; some may be paying heavy interest rate on home loan. Whatever the mistakes are, this slowdown offers an opportunity to relook and re-allocate.

Trivia: Money & mental health

There is little doubt that money cannot buy happiness & peace. But loss of it can surely bring a lot of turmoil in our life. Since it’s a season of “fall”, we are sharing few stories where these unfortunate things have happened. It teaches us the same old lesson of “not putting all the eggs in one basket”.

Story 1: Since the past 13 years, Keshav worked in a well reputed broking company in Mumbai. Over these years, the broking company diversified into many other financial services business and grew 10x in size. Not only did he make a good career, but he also made good wealth – a healthy salary, assured bonuses and generous ESOP program. The share price increased 6x over 2015-18 and Keshav’s ESOP value alone surged to Rs. 2 crores. He got so confident on his company’s success that he started investing a large part of his savings into company’s bonds (offering 9-10% interest). All looked good until Sep, 2018.

This company suffered so much in the slow economic environment that its share price fell by 70% and has retrenched 30% of its employees including Keshav. To add salt to the wounds, Keshav is worried that his “fixed income” investments in the company’s bonds may also go bad. Keshav was already thinking of retiring at age of 40. Unfortunately, he is now looking out for job and anxious about the erosion in his wealth.

Story 2: Sandhya, a mother of two, had always been a happy home maker. Fortune wasn’t kind on her personal life and she had to separate from her spouse. The only silver lining was that she got 50lacs as maintenance amount as a part of the separation. Having no experience in handling finances, she approached her family for advice and invested all the money in bank fixed deposits instead of spreading it out in other low risk instruments.

While bank FDs are always assumed to be safe, Sandhya’s misfortune was that the bank wasn’t safe. Half of her money was parked in a cooperative bank, which just went bankrupt. The only reason she parked money in that bank was because it was close to her house. While she realises that the bank is in trouble, she doesn’t have an idea of the long battle ahead for getting back her own money.

Feel free to reach out in case you need professional help with 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 of individuals mentioned above have been changed to protect their real identities