Thursday, 7 January 2016

Stay Solvent, Stay Invested


It is again that time of the year when there is a slight nip in the air, we pull out the sweaters and jackets from the wardrobes and become nostalgic about the year gone by and excited about a fresh new year coming up. I am exactly in the same mood myself so here is a little bit of what went on in 2015 and some worthless crystal ball gazing for 2016.

The year started with the benchmark BSE Sensex at about 27,500 and ended the year at close to 26,000 losing about 5.5%. During the year, the index went up beyond 30,000 and fell to a low of 24,800, fluctuating 2500 points on either side of the starting mark of the year. Macro economical events held sway on a lot of the market gyrations. Starting from the US Fed rate cut, Greek referendum to remain in the Eurozone, Chinese decline and continued pressure on oil prices and other commodities made their presence felt on the Indian markets. Another very important event which took place was the decision by the government to allow investment of its corpus into the Indian equity markets. This year saw EPFO deciding to invest 5% of its incremental corpus being invested. This is a long-term game changer for India as we would become less dependent on FII flows.

Indian corporate earnings failed to accelerate during the year and the initial euphoria of having a majority government seems to have died down now as people have begun realizing that bringing the Indian economy back on the growth path is not a short term fix. It will take time and the final outcome is also uncertain as the world is going through a deflationary / recessionary phase. India has had a huge benefit from the multi-year collapse of crude oil. That has given some breathing space to the government to get their house in order. At the cost of hazarding a guess, I would think that we will continue to have benign oil prices for atleast a couple of years more, so we have to make these years count.

Mr. Raghuram Rajan has been a bright spot in our economic landscape. I sure hope the government is prudent enough to extend his tenure. Mr Rajan has over this year take steps to bring in more competition into the banking space by giving out licenses for new full service banks and payment banks. He has also resisted the call to reduce rates for most of the year and only did it when the specter of inflation receded. The overall NPA situation in the banking sector continues to be precarious. Mid-sized PSU banks are the most at risk as the new banks will hit their customer base. (For some more information, read "Payment Banks - Airtel Bank in the making?")

Another aspect which is beginning to get scary is the fresh breed of investors / traders who have not seen multiple cycles or major drawdowns on the portfolios talk flippantly about sustainable growth of net profits of 25% or PEs of 30. When this type of cacophony increases, it is time to be careful. Safir Anand has written a great post which I suggest all to read (link here). For a prudent investor, what is critical is to make sure you don't lose your capital permanently. Some of the midcap and smallcaps I see people chasing these days are apt to do just that. Everyone wants a "multibagger" these days. No one is happy with a 20% compounder!!!

In 2016, I think there are a lot of macro headwinds. Chinese slowdown, Eurozone issues are likely to crop up anytime, US interest rates going up, Indian state elections, Crude price volatility all will play out at one point or the other. Like every year my outlook is to protect capital and look for reasonable returns. In fact, I am trying to moderate my expectations so that high expectations don't force me into risky trades.

A step-up in public investment as the government fights to avert an economic slowdown might start paying some dividends in the latter half of the year. Plays on infra or infra-ancillaries can be a good long term bet. Consumption stocks could also get a boost from the pay commission award.

Lastly, stay solvent, stay invested, and have a great year.

1 comment:

  1. The Sensex declined 122.60 points to 24702.23 and the Nifty fell 55.65 points to 7500.30.
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