Not in a hurry to turnaround……

Slow TurnaroundThe Indian stock markets which had an euphoric rally in 2014, turned down in 2015 and is looking to have another negative year in 2016. Price increase in stocks are always backed by earnings growth, and when earnings show a slowdown, price moves either get flat or decline based on the interests each individual stock has built in it.

In 2014, earnings growth was very good and it supported the price increase following which expectations got higher and it fuelled the valuations to get a little bit stretched. Once the reality set in to show that the expectations were wrong, rather it was in fact the other way around, a slowdown in the growth rates, investors were in for a surprise. All of a sudden all the buy orders became sell orders and hence the larger fall we have had in the markets post Chinese market crisis.

Automobile companies which were leaders in 2014 began to slow down on their growth. Infrastructure restructuring which was expected to be big and to support the banking sector, has been taking more than the anticipated time to get on the roads. New sectors that began to show strength were NBFC’s and Pharma along with export based businesses. Each one went on to face its own challenges. As spending declined, which has been shown in the top line growth of the Indian businesses in their December financial results, with sales growth in the lower single digits and profits showing an increase which means, companies have resorted to controlling operations to increase profits, which is also a negative in a growth story. Controlling operations expenses cannot continue for a long period. Without sales growth, it will bring in more challenges. This facilitated the weakness in the NBFC sector. USFDA played the devil’s advocate to pharma companies, big names in the Pharma space began to fall like nine pins. Between 20-30% drop in prices of stocks like Dr. Reddy’s Cadila, Cipla etc.,

Exports sector went into a different challenge, external forces played against them, all of a sudden they become un-competitive to their markets following the devaluation of Chinese currency. Orders began to slow down and some of the prominent stocks have lost more than 50% from their peak price.

With big time damages done to the markets, Indices Nifty and SENSEX breached their near term supports and turned bearish. Within few months what was the world’s best economy became the opposite. Now, it will take a little longer than anyone could guess for the markets to turn around. Government through its next arsenal, “THE BUDGET” looks like not to give any big fillip, with just a couple of days for the budget, markets don’t show any kind of strength. Next triggers can come only from the Q4 results, which already shows weakness as banks like SBI have announced that, they are going to show more bad loans in their books.

The best way to approach the market at these troubled times is to wait on the side lines, ready with funds to take the next opportunity early on. In our portfolio for our clients, we have liquidated most of our holdings baring very few best performing stocks like Bajaj Finance, Pidilite etc., Being invested in short term debt will help our capital grow at nominal rates till the next opportunity arrives. In Equity investing, if we deploy this method of getting in when the markets are strong and out when it is weak, it is possible to outperform the benchmarks over a longer period. Hence, again it gets proved that, buy and hold will not be the best strategy in Equity investing. It can only give returns to the extent of that which is got from FD’s. Rarely one can find stocks that have given super normal returns on a continuous basis for decades.

Take a look at your portfolio and do a churn of holdings wherever required and be in cash to take the next opportunity.

After Ghostly October its December pain now…..

IWaiting GirlOctober was perceived to be a weak month for the markets based on past records, while it went on to be a fairly good month. Whereas November took a marginal hit & now comes the December pain. In the last 5 years, 2 years in December was negative. So, will this year turn out to be a weak one for our markets?
Now the dynamics have taken a different shape. December has a lot of events which will make the markets swing on both directions. Some important news flow are expected on the implementation of GST and FED interest rate hike and it is most likely that in December the markets are going to be volatile. SENSEX should re-test the 25100 levels reached in August to gain strength before any rally can happen, which has a fairly good chance to occur in December.
After the Bihar election results, the government at the center has an urgent need to bring some reforms into action, while the support at the Rajya Sabha to do that, will not let it happen smoothly. So, GST may or may not happen in the winter session of the parliament. This can be tricky on the markets.
Raguram Rajan has cleared that there is not going to be any positive surprise from his side in the December policy review, which is now confirmed that there is not going to be any good news to the markets from this front.
Gold Bonds, the brainchild of Rajan, did see some good take off with about ₹917 crores on investment coming in, over a period this product will gain some market share which is a very good change for our country as we need not import Gold and that much of FOREX is saved, boosting the Current Account Deficit numbers.
Again the FED issue is getting into limelight, with the jobs data in the US markets showing strength, there are fairly good chances that the FED will hike interest rates. As of now FII’s are on the side-lines having the positive expectation on the FED meet, which if interest rates are increased, though will not cause a bigger impact to our markets as the FII’s have already sold off. While on the other hand if the decision gets postponed or has come confirmation that it is going to be delayed, then, we should look at some inflows from the Foreign Portfolio Investors (FPI’s). With the domestic institutions already having a strong hand on the markets, any support from the FPI front will give an additional strength to the markets.
So, it is confirmed that there is a lot of confusion prevailing at the moment and the line of resistance in on the down side. If it so happens, which has a fairly good chance, it is good for the markets as it will build the strength required and move up. And this base building will not happen in a hurry; it will take its own time which, in the process will kill patience of traders and investors, who got into the market in the later part of the 2014-15 rallies.
Weaker hands in the market should get moved out to have a strong rally.

With such confusion prevailing what can happen to investments?
Our market is in a clear bull market trend, so all the corrections and consolidations are an advantage to accumulate on the investments, while it will require smart decisions. There are a good number of businesses which are very attractive based on their earnings, these stocks will move up and give opportunities to profit.
Pharma, NBFC, Textiles and some select technology stocks will have good runs in the coming month. Whereas the large cap stocks that form the broader indices like the SENSEX and NIFTY will have pressure. Banking is weak and is not in a hurry to run up. Metals are still weak, which might see some more consolidation and down ward pressure.
Stock investments are going to be volatile in performance; even the Equity Mutual Funds will have pressure on their performance. Baring few schemes like the ICICI Prudential Exports, which has a very dynamic portfolio, holding on to the best stocks.

Results of the September quarter was muted, sales growth was sluggish which did not bring out any businesses worthy of investment, some existing ones that were in the growth phase continue to hold on to their performance, while some prominent ones like Eicher Motors, Page Industries which had been commanding a major share of long term investment portfolios have moved out following slowdown in their business growth. These are stocks that have given its investors more than 1000 percent profits in the last 5 to 6 years and now it is correction time for them.
In the Pharma sector, front line stocks have taken a very big hit following USFDA issues, Dr. Reddy’s has lost more than 35% of its value in 2 weeks from the time the US authorities began questioning them. While bigger players have been losing the mid-caps in this segment are doing well. Stocks like Alembic Pharma, Aurobindo Pharma, Cadila etc., are getting more exposure in portfolios.

How is 2015 likely to end for the Indian Stock markets?
So far from January 2015, the major indices like the SENSEX are down about 4% and with no big booster dose available in the month of December, SENSEX is likely to close negative for 2015. After a gain of 40+ percentage in 2014, the very next year getting into Red is of a concern to the long term trend of our country.
One good advantage with a prolonged correction or consolidation as it should be fairly called, since the markets have begun to consolidate after a pretty strong rally is that the break out from the consolidation will have a higher chance of going into another very strong rally. With the prevailing economic conditions and the way India is positioned among the global markets, we will have some more super strong growth years to experience.

How is BTT portfolio placed in the markets now?
Before the markets began to consolidate, the SENSEX reached its peak in April 2015, while our portfolio held on to its strength, reached a new peak in August, just before the Chinese market crisis, which showed that our portfolio was stronger than the SENSEX. As soon as the correction set in, we had a slew of exits from the investments which had given substantial gains and have begun to get slow on their growth, in our portfolio which brought down our exposure in the markets by 25%. Our performance for 2015 has mimicked the SENSEX.
Now, there is a question, with a strong portfolio and reduced exposure, why are we not outperforming the indices?
The stocks that form our portfolio are super strong on their fundamental strength, due to which the price increase was very high. We have stocks that have generated triple digit growths on their stock prices within 2-3 months from the date of our investment. Such high growth in price have the tendency to correct faster too when the whole market gets subdued, due to which the impact on the performance is high. This impact should have normally caused under perform to under perform the broader markets, while it was not. The reason that we are at par with the index in performance was due to the reduction in exposure.
September results did not bring out new investment opportunities and with the subdued sentiment in the markets even in the festive season, January results are also not likely to show any big surprises. We will be adding new investments only when the companies begin to report good numbers and until then, we will be light on exposure giving the best possible safety to the capital invested.

When will the market go up?

ConsolidatePost China crisis, our stock markets have moved into correction mode. There were continuous challenges in the form of disturbances like the Volkswagen scandal, Bihar election results, attack on Paris along with the regular nuances like the FED rate hike and the selling by the Foreign Portfolio Investors (FPI) in our markets, which has almost become like a monthly issue.

In October, there was the fear of the FED hiking interest rates which got postponed to December, now the fear has come back again on the thoughts that, whether there will be a re-thinking by Yellen. And every time there is this news about the interest rate hike, it gets followed by the withdrawal of the FPI’s from our market. We have been so much at the mercy of foreign investors to support our market; a small change in their thought itself creates a downturn in our markets. As an emerging market, we have got used to this foreign investment to support our markets.

While in reality, the present situation in our markets has taken a different direction. Dependency on foreign money to move our markets are slowly coming to an end. From the data that is available it is clearly visible that the foreign support is no more required for our markets. In the April to October period, domestic institutions and retail investors have bought stocks worth 51000 Crores, on an average the domestic funds are buying stocks worth 6638 Crores or just about $1 billion, every month since May 2014 as against the FPI contribution of $787 million in the same period.

These figures show that any kind of selling by FPI’s is getting absorbed by the domestic purchase. The investment dynamics of the Indian public have had a dramatic change; SIP’s used to be about 1000 crores per month before 2014, which has now got increased to 2500 Crores per month. The beauty here is that, all this money is going into the midcaps and not the large caps. When we talk about so much inflows and the market is still weak, doubts arise as to why it is so?

The FPI’s are mostly invested in the large cap stocks, which they are liquidating, apart from the fact that the reduced interest rates will become attractive for these investors to be invested in their economies; they are realizing the mistake of wrong investments. Large cap stocks have become poor performers in the present market. The SENSEX dropped 1.48% on 18th November 2015, while the mid cap index dropped only 0.68%, the reason was FPI selling in large caps. Stocks like Larsen & Toubro, ONGC, TATA Steel etc., have been losing heavily, while their mid cap counter parts like Eicher, Page etc., are gaining big time. In the last week alone Dr. Reddy’s lost more than 25%, along with it all the frontline Pharma companies losing a large portion of their value, while stocks like Aurobindo Pharma, Cadilla, Glenmark etc., did not lose much.

Pressure of the USFDA investigations have brought down the stock prices of most of the big names in the Parma Sector. Again, this USFDA is one another issue that has been haunting our markets often. There is too much of dependency by our frontline Pharma companies for their sales from the US markets and the US is commanding, this situation will change soon. Our companies will realize that there is a similar market available in the rest of the world and with the medical facilities getting improved in India, one of the biggest economies by population, India sales itself will have a bigger contribution in the years to come.

In the first 20 days in November, FI’s have sold in our markets to the extent of 7200 Crores while the domestic institutions have bought for 17360 crores. It is close to 150% more than the sales that have happened. Most of the selling was in the frontline stocks and the buying was in the mid cap space. To some extent the selling pressure is getting absorbed by the local institutions and that is the reason we have the markets going up and down in short periods. It is like a sort of confusion and will result in a prolonged consolidation.

FPI’s are forced to re-align their portfolio if they have to make money from our markets, hence the selling pressure. Whereas the domestic funds are already loaded into mid-caps which have had a very good run and are also adding to their portfolio taking advantage of the correction in the market. Our markets witnessed an above 40% straight rally after the new government got elected, from such a steep rise, it has to get re-adjusted before it takes off again and this readjustment will take a little more time. The way the charts are formed, the bullish sentiment is pretty strong. If the next round of bullish move has to be even stronger, like the experience we had in the 2003-2008 bull market, the markets have to consolidate and re-shuffle leadership.

happy-investorsLast year Automobile stocks had a great run supported by good earnings from the companies, while this year, they have a kind of taken back seat. Most of them have completed their dream runs. Now the leadership position is slowly getting shifted to Pharma and NBFC stocks. September quarter results were muted, the average sales growth has been around 1.50% while the earnings growth is at 7%, which shows that companies are cutting down costs to increase profits and this cannot continue for long. Soon, we will have sales numbers showing up.

This change in leadership is going to take some time to get aligned, maybe till the 3rd quarter results are out, in which there can be some positive surprises. Till that time, the markets will not turn bearish; it will consolidate at the present levels and then break out. The longer the consolidation, so much stronger will be the next rally, while in the consolidation period; it will kill the patience of anxious investors. For those who stay with patience, the next rally will be a bigger reward. The same happened in 2014, before the 45% rally we had between March 2014 and April 2015, the markets consolidated for a full long year staying within a 15% range in 2013.

With Money BagsPresently the consolidation is again at 15%, the more it gets stretched, and the chances of another 45% rally are higher. In such a scenario the SENSEX should be at 43500 and the NIFTY at 13150. At present these numbers look a little too over optimistic, while it was the same when there were talks of SENSEX to reach 30000, in early 2014, hard to believe, while it did happen. The SENSEX breached 30000 in March 2015.

As I complete this writing, I myself am getting euphoric, how throwing a little light on the hindsight has given a very beautiful picture to look at in the future. For those who have missed the 2014 opportunity, there is one more chance waiting to happen, take advantage and grow your savings faster.

Anticipation & caution as markets go volatile.

lower-interest-ratesAfter the August sell off post China Crisis, September began with a consolidation while our PM met with the Industry leaders, bankers and economist to get ideas on managing the prevailing global turbulence. He had requested the industry captains to increase their risk and step up investments. The industry leaders used this opportunity to ask for policy actions that will improve the ease of doing business and the need for the interest to be reduced at the earliest.

This action brought strength into the markets which got supported by the European and Asian markets showing recovery along with some strength in the Indian Currency. Following which Government approved several reforms including the allowing of telecom companies to sell radio waves, added as a booster to hold support for the strength in the markets. The European markets charged further following the rise in exports and imports in Germany.

However there was still a lot of caution in the markets as investors were anxious on the outcome of the US Federal Reserve policy, which turned to be subtle as the cut was postponed. There is expectation that the strong fundamentals of India will provide enough protection from the global developments.

Then came, the sudden news of Volkswagen cheating the US markets with a fake emission report which shook the automobile stocks worldwide, Volkswagen lost 48% of its stock value in 2 days, which also impacted many of the prominent Indian companies having big presence in the European markets like Motherson Sumi, Bharat Forge, Bosch etc.,

The reports that the inflation went down to 3.66% and the Wholesale Price Index being negative at -4.95%, was a good stimulus to the markets and then followed the surprise from the RBI with a 0.50% interest rate cut, after which markets went into rally mode.

The ambitious goal to have the inflation at 6% by January 2016 looks like an achievable target. The RBI has now started working towards having the inflation at 5% in 2016-17. All these developments will take our economy to levels which we haven’t seen so far in our life.

Even after all these developments FII’s were net sellers while the Mutual Funds kept continuing with their buying spree in the markets. There are fairly high chances that the FII’s will return back and with a higher allocation for India.

In the meantime, Saudi Arabia withdrew about $70 billion from global asset managers to bring down the widening deficit & reduce exposure to volatile economies as their economy is going into a recession. On the other side of the globe Prime Minister Naredra Modi’s bilateral meet with the US president Mr. Barrack Obama concluded on a high note. Among the countries present like Pakistan & China, India became the centre of attraction. Business captains in the US committed to more investments in India which is a very nice development for our economy.

What was done on the portfolio?

There were 5 exits, 2 reduction of exposure, 6 additions and 2 increases in exposure. Our portfolio is going through a dramatic shift. In the first week of September we moved out of MM Forgings and Bharat Forge well before the Volkswagen news hit the markets, thus saving bigger losses. SKS Micro was exited after the company missed the Small Banking license. Schneider and Sun Pharma Advanced Research moved out of our portfolio. We brought down exposure in Cadila and Welcorp by 100 basis points following their ratings coming down on our ranking tables.

MaduraBrandsOn the additions side, we had 0.50 basis points increase in exposure to Aegis Chemicals and Cosmo Films and have added 100 basis points new exposure to Britannia Industries, Himatsingka Seide, JMC Projects, FDC, Aditya Birla Nuvo and Deep Industries.

Auto sector exposure is getting reduced considerably and is getting replaced with companies having good exports revenue and consumer centric businesses. Weakness in the Rupee is an advantage for companies having export revenues.

This festive season, as you shop for your Van Heusen, Louis Philippe, Allen Solly, Peter England and Planet Fashion for your clothing needs, you will be making a small profit to yourself due to your ownership in Aditya Birla.

Britannia has made a packaging change and has gone into a new promotion, its business is growing, and so, the next time you pick a ‘GOOD DAY’ biscuit pack in the store, you will be contributing a small profit to yourself.

We also have exposure in Hindustan Petroleum, every time you fill gas at the HPCL bunk, you make a small profit.

Feels good that our portfolio owns companies that produce most of the daily use products, just our consumption will not have an impact on the profit of the company, while we can take pride that we are using the products of companies that we own, is it not a good feeling?