Top 30 losers of 2018-19

As markets turned down from bull to bear after the 2018 budgets, along with good stocks that gave up in price to adjust for extended valuations, there were some big names that have collapsed in price.

Here is the list of top 30 wealth destroyers of 2018-19.

It is sad to see that stocks have lost about 67 to 98% of their price in just 1 year. Among them here are some very poor quality names that had shady or unethical promoters like the Reliance Adag group, DHFL, McLeod Etc. Promoters who took advantage of their corporate presence to grow personal wealth. In some places greed made them use liquid assets to own illiquid assets, which turned out a nightmare to them when they had the need to repay the borrowings that they created pledging shares of their companies.

DHFL, Yes Bank CG Power, Coffee Day, McLeod, most of them bet their greed on real estate and lost badly. Poor corporate governance got added to their greed. We have some very prominent names like Yes Bank losing almost 85%.

It is said in the markets that, when a stock loses 20% in a very short span, chances of the stock getting back to normal is bleak. Here we have stocks giving away more than 65%, which means all of these stocks have kind of completed their life cycle.

Among the above names we did have exposure to some of them in their hay days like Graphite, HEG, IBull Ventures and even DHFL. In all of these exposures we have booked minimum 100 to 300% profits.

On hindsight, when we look back, it is the process that helped us get the best out of any stock that we invested. For example, DHFL, we picked it at 340 levels when the company was giving out good results. Trend continued pushing the stock to 680 levels from where it turned down. When this down side happens, results had kind of showed slowdown in growth. DHFL moved out of our ranking tables and triggered exit for us.

We did not exit at the top, while got out at 642 levels, almost pocketing 100% in 10 months.

In Graphite we had an early entry, we picked up at 155 levels, stayed invested for more than 18 months. Graphite has a continuous rally in price without any tiredness.

Earnings too supported with robust growth, by 4th quarter of FY18, it showed tiredness, we had exit signal at 900 levels. At that time SEBI and Exchanges played havoc in the markets. Both re-categorisation and Additional Surveillance Margins killed the stock price. It had continuous down freezes which gave us exit only at 643. Yet we made a little more than 300% in this stock, while had the opportunity to book 500%.

The learning at that time was, even a good stock can get hammered when regulators step in. Had to accept the gains left for us and not worry about that which is lost.

Now after a year since we had exited most of these positions, there is an even big learning. Come what may, follow your rules, you will be saved always. Today we own none of these stocks. Feels proud when we see the prices, on the hindsight mind thinks, we have made good a big chunk of profits from these stocks which today seems nowhere close to them.

For those who have a strategy, follow it divinely, profits are available in loads.

Lower inflation will cap income from debt investments

India’s developments have become visible in all areas of economic activity. For a very long time, I remember in my school days, teachers used to say that, inflation in our country is high which posses a big challenge to save money. Slowly this challenge is becoming a myth, we have successfully brought down the inflation rates to below 4% levels.

When Raghuram Rajan talked about this a couple of years back, media brushed aside saying that, it is not going to be easy. Now, as we have reached the goal and beyond, we are looking at a newer challenge. When inflation is low and bank rates are high, real return in the economy is also high. This brings the challenge of having to pay higher taxes on income earned from debt investments which qualify for indexation benefits as well as assets like Real Estate.

In 2014, the debt returns were at 8.7% and tax payable was NIL after indexation. In 2017, the returns is almost the same, where the taxable portion of the income has moved up to ₹15742. Which means more than 50% of the returns will be taxed at 20%, thereby bringing down the net returns by more than 10%.

It is interesting to note how new challenges are coming up in life. If inflation stays low and the bank rate does not come down, taxes on debt fund returns will go up making the net gains reasonably lower. Investors in debt funds will have to re-think their investments.

They will also look to Equity funds which is already getting over crowded. Presently running at about 6 lakh crores and with expectations that there is going to be big inflows due to poor FD returns. Fund managers will now have a bigger challenge on stock selection and allocation of funds.

As it is MF’s are holding cash to the maximum permissible limits, presently a scheme can hold 10% cash. When holding cash in anticipation of a correction, if the market keeps moving higher, all these funds or schemes will have under performance against the broad markets. To avoid investors wrath, fund managers will be forced to invest into stocks that are fundamentally poor, thereby attracting very high risk on the investments.

If markets change course, the retail money that has flocked the Indian Mutual Fund industry will begin to move out, again giving the next challenge of meeting redemption pressures.

As the returns from debt funds are going to become lower due to taxes, what can be the next best alternative. Arbitrage funds will be the next place where we will see high inflows. Arbitrage funds are giving returns that are about equal to the prevailing bank rates for Fixed maturities, the biggest advantage they have is the tax free status or Equity taxation status.

Whereas, Arbitrage cannot absorb big flows as the edge to get returns will move away with huge capital chasing the same instruments in the market, which will bring down returns. As every other door to big returns will get locked as an automatic process, investors will be facing a situation of having surplus liquidity and not knowing what to do with it.

Bank rates coming down or inflation moving up is a requirement to keep things as they are, even this condition will require that, the fund flows into the mutual fund market requires a slowdown. All of a sudden the whole country put all their savings into one asset class will for sure ensure that the asset collapses on its own weight. Beyond our inflows, foreign money is also chasing Indian markets big time. FPI limit of 51b$ has got exhausted as I write this article and RBI is thinking to open another 2b$ for FPI’s.

One more change that could come is the returns on debt funds will begin to decline, which is inevitable & get self adjusted.

Investors beware, quality of your investment needs to looked at on highest priority. Just going to a website and selecting the top ranked fund will no more give the best returns. People need to take help of advisers while doing their investments. soon, we will have analysts who will research and find good Mutual Fund Schemes for investments.

1.30 Trillion $ earning negative returns globally

There are about 1.30 trillion $ of money that is earning negative returns globally, in the bond markets, there are about 12 Trillion $ that have turned negative as demand surged for quality papers. This is a very good opportunity for countries like India as there are very few countries today with quality papers available, that are having high returns. Chances are that, a major part of these funds can find their way to India. If that happens, it will be a good advantage to stock investors too, as some of it will also move into Equities which will increase the valuations higher.

In countries like Japan, which is the second largest economy today by valuations, companies are sitting with huge cash reserves, not finding ways to deploy them in their country. In Japan these days, shareholders meetings more than 1000 shareholders turning up, which was earlier only in the higher 100’s in number. All because of the concern that, growth is not happening and their businesses are idling capital. These shareholders have now began to ask the managements on the plans for deploying the funds and they have become specific in asking how much is going to be allocated to India.

World over, pension funds have a certain percentage of their funds to be deployed in emerging markets. While among the Emerging markets, India is the leader both in current performance and potential, which is going to attract a major chunk of the allocations.

India is becoming the next economic super power, giving best of returns potential both, from its debt markets as well as the Stock markets. With so much of funds likely to be routed to India, the Equity valuations are going to be far higher than what we have now. All these money are going to chase the same small number of quality stocks available in our country, which will push the PE multiples of those stocks. So, people can leave of the worries of high PE’s multiples and just stay invested in the quality businesses of India. It is boom time for Indian markets, capitalize on this greatest opportunity.