Stock markets ready for its next euphoric rally

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Expectations….expectations. Expectations, towards the end of a Government term which did not have the confidence to decide on any plans that will allow the economy to grow. Expectation on the team that was coming to power, which was aggressive. Expectation on Narendra Modi, who was presumed to be a strong decision maker, as the next Prime Minister. Expectation that, the new government will clear all the infra projects awaiting clearance, which will drive the economy into a robust growth phase.  Indian economy staged a pretty strong recovery and went on to give a robust growth.

Favourable RBI policies, supported by Raghuram Rajan’s strong commitment to revive the Indian economy with his bold decisions on the interest front along with the cleaning up the banking system. His decision to impose curbs on Gold consumption, bring transparency into the Real Estate markets.

Almost all the external factors supported the expected growth. Crude Oil prices crashed, never to see the high’s that it went through. Favourable monsoon, good automobile sales followed by growth in profits of companies in competence. 2014 was a wonderful year for investors as the SENSEX surged more than 40%.

This expectation fizzled out earlier than it was to, things changed. As markets grew leaps and bounds, businesses did not see growth in sales. People began to complain that, “only the stock markets are moving up, money flow is not seen yet. No visible developments in the economy.”  Soon, it was followed by the historical crash of the Chinese markets. Volkswagen case and normal to flat growth from the businesses, markets turned down, went into a tailspin throughout 2015.

After the March quarter results, there are glimpses of change visible. One of the most important factors in the results announced so far is that, sales growth has been still at a slower pace, while profits are showing good growth numbers. Such number growth is possible only if operations are controlled. On one side it is a negative, as controlling operational expenses cannot give continuous growth, it can become counterproductive.

While, on the other side, there are green shoots visible, if the companies who have managed to bring down their expenses, continue to maintain the same tightness on their expenditure and along with that when the sales numbers improve, the profit margins are going to be phenomenal. And that would mean a euphoric rally in stock prices.

As many analysts say on the media, “we are in a cusp of a great bull market” the future looks very attractive for India. It is time to give more exposure to Equity investments. For those who have missed the 2014 rally, now there is an even bigger price move waiting to happen. Those who have maintained a wait and watch on their stock investments, now it is the right time to begin investing. One can even think of adding to their existing investments. Those of you who had stopped their SIP’s or had moved to the debt markets for safety of capital can now think of venturing into the Equities segment to have very good gains.

If things pan out well, we might witness a rally in stock prices, which we had not seen so far in the Indian Stock market history. The next 5 years are going to be a boon to all those investors who venture into the markets.

Take advantage of the markets next move; at the early stage itself, waiting for more confirmation will only result in lost opportunities.

Stars of the Modi Sarkar

It’s been 2 years since Modi Sarkar is in power and the expectations that Modi was to deliver propelled the financial markets to big rally. What began with a lot of euphoria began to weed out as results of companies failed to keep pace. In the 2 year period there were some businesses which did tremendously well on the sales and profits as well as on their stock prices, while there were many laggards which took away investor wealth along with their confidence.

Mid caps were the stars of the rally and there were 17 stocks which zoomed more than 100%. Among them the top 4 were from diverse sectors which had more than 200%. All the 4 were part of our portfolio and we still hold to 3 of them Bajaj Finance, Ashok Leyland and 3M India.

Top4 Gainers.May16

Stocks that gained more than 100% were-

HPCL, Marico, India Bulls Housing, Piramal Enterprises, Torrent Pharma, Berger Paints, Emami etc., and among the 100% gainers too, we had 4 of the stocks in our portfolio.

It was not a rosy period for all the stocks in our market, we did have 20 stocks that fell in value in the last 2 years. Losses were between 5-90%, between them the top 4 losers were the following.

Top Losers may16

None of the above were in our portfolio, having the best performers and not having any of the weak ones in the portfolio is what helped us have phenomenal growth against the broader benchmarks.

In the last 2 years the returns from SENSEX, MIDCAP and Bravisa Temple Tree shows the superior returns we were able to achieve.

BTT with Index May16

“Midcaps have delivered significant returns over the last three-five years compared to large cap funds but you have to be wary that they are more volatile. So you clearly need to have a long-term horizon in terms of investing in some of these funds. So, I will say even 5-7 years might be a short time because you can have cycles in the market where mid-caps might under perform and since they have run up so much, you have to be a little cautious when entering this segment.” – Kaustubh Belapurkar, Director – Manager Research, Morning star India.

Pre-election rally began with the banking stocks in 2014, while surprisingly, apart from Yes Bank, all of the bank stocks 20-73%. In our portfolio, we were totally out of banking exposure since 2013, just before the challenges we faced in the Subba Rao period. After Raghuram Rajan stepped in, our economy went into a dramatic change, while there is still a long way to go before the banking stocks get strength, because there have been so much muck to be cleaned in them, without Raghuram Rajan, it wouldn’t have been possible for sure.

Factors like ease of doing business, Make in India, Roads and Railway infrastructure along with GST will instill very good growth for our economy, selecting the right stocks and being invested in them till they complete their growth phase will give any investor tremendous profit potential on their investments.

FII favorites were our favorites too

FIIsFavourite.11.05.16Shareholding data the companies have provided to the exchanges reveal that foreign institutional investors were selective on their stock picks and from the data, there were about 44 companies in which the FII’s had considerable stakes.

Money control has published this data and out of the 44 stocks, only 12 had negative price moves, while the other 32 were largely positive and 7 out of them had given more than 100% profits in the last 1 year. Following is the list of those companies.

 

Our portfolio in the last year consisted of 14 stocks from this list and 4 of the top 7 that made more than 100% profits. Hence we were able to beat the SENSEX in returns consistently.

Having a strategy to invest only in those companies that are showing growth on their sales and profits quarter on quarter, helps the investment to have phenomenal growth over a longer period.

When the broad markets turn weak, even this portfolio will turn down, while the advantage is that the weakest among the stocks that have formed the portfolio move out and the rest of them stay put and continue their stronger run.

Some of the stocks that consisted our portfolio among the top 7 stocks were TATA ELXSI, Indo Count, Jubilant Like, Take Solutions.

Gaining leadership again…

Perf.13.05.16

In the last 30 days our portfolio outperformed the Nifty with a positive gain of 3.10% while the index had -0.60% returns. This was possible because of the good performance the fundamentally strong stocks had along with the new companies that came into our portfolio.

We have added companies from the Paper and Sugar sector into our portfolio. The coincidence here is that, Sugar & Paper are complementary products. As the consumption of Sugar is increasing so it paper, is that true? Don’t know if it is true, while the balance sheet numbers are saying that, both the sectors are gaining leadership among other sectors. Presently we have exposure of 3% each into both the sectors.

Along with the above sectors, financial sector, predominantly the NBFC’s have done pretty well and have helped us have out performance. With new stocks getting added to the portfolio, we look forward to have strong performance in the months to come.

Portfolio performance April 2016

Perf.29.04.16

When a person invests his earnings be it in any asset class, either Real Estate, Fixed Deposits, Gold, Mutual Funds or Stocks, the one single minded approach here would be to beat the benchmark or how is my investment doing against its peers?

Whatever be the condition, all of us want to be the best, the same holds good with investments too. We should be making the best returns when compared to others. If we find that our investments are giving double the returns against other assets, there is full of joy. If we find that we are marginally above the benchmark, say the SENSEX is 10% and we are 11%, still we are happy, because we are outperforming.

Suppose we find that we are negative to the benchmark, say the SENSEX is 10% and we are 9%. There is worry and it is good too, because, this is the condition where thinking process comes to play. Should I hold on or shift my investments? In most of the situations where there is below average growth in investments, people have missed to observe and take action of this condition, where, the investment is under-performing and they have not taken action.

To help our clients know how their investments are performing against the SENSEX or NIFTY, we have begun an initiative to report the performance of our portfolio against that of NIFTY every fortnight, with details about what is right and wrong. It will be of help to our investors to know if the money is safe and give confidence about the future.

From the time that we have been tracking the performance of our portfolio since December 2012, our portfolio has managed to have 61% profits against the NIFTY returns of 33%. We had an advantage as our portfolio consisted of strong growth stocks. As we come to the shorter periods, in the last 1 year, our portfolio was positive with a near 1% profit where the SENSEX had lost 5.63%.

Whereas on the last 6 months and 3 months period, we are trailing the benchmark, the reason behind the underperformance is that, most of the stocks in our portfolio were exited following the market weakness in December and January 2016. After the sell out that our markets had, which was overdone following the Global slowdown, our exposure in the markets were down to less than 15%. Cash was moved to debt funds to protect the account from any further weakness.

On a normal process, stocks move in and out based on their fundamental strength, now that our portfolio has exited almost all its holdings, it will take a couple of quarters to load stocks to it, from the sectors that show renewed strength.

Till the September results are out, markets are likely to be range bound while adding a couple of stronger stocks, that show strength on their earnings.

SIP’s gain popularity, has the risk come down?

PopularFollowing the good run up our stock markets had in 2014-15, the confidence among retail investors have increased considerably. On a normal course when the markets correct, even though it is a regular process and will get back and move up soon, people used to get weary of losses. They used to stop SIP’s and pull out their investments.

And most of the times the timing would be against them, when the decision is made to get in, that would be the time when the markets were exhausted and begin to move down, and when they decide that, enough of the pain from losses and get out, that will be the time the markets will begin to move up into a new bull market.

No one can time the markets perfectly, so, one of the methods to ensure that we are there for the bigger haul is to stay invested, and for that SIP is a best way to go. It helps us have the cost averaging, and help us achieve a better return than the benchmark, say the SENSEX.

For the first time in the history of the Indian markets, retail investors have maturity; they have decided to stay invested using the SIP route. There is a 26% increase in SIP’s registered this year and the average live SIP has moved up from ₹3368.40 to ₹3449.80.

The increase in investments to Equities is not only because people have become smart, it also because of the fact that other investment avenues like banks and real estate are having lack lustre performance and is forcing them to move into equities. Unlike the earlier years, if the retail investors stay invested for a longer period, they will taste the richness of equities and will continue to have it as one of their preferred investment asset.

 

What about the risk?

As we have the advantage of cost averaging which will get us more units when the markets are down and lesser units when the markets are up, so that we are at the receiving end always. Does that mean the investment is zero risk?

No, risk still remains the same, there was a research made on SIP’s with the SENSEX for a 10 year period, the returns were not phenomenal, it was the same as the index. Then, fund managers complained, “Don’t check the returns with the SENSEX, instead use the NAV of any Mutual Fund”. So it went on and got tracked using the oldest NAV based Mutual Fund scheme in India – UTI Mastershare. The chart above shows that, it is mimicking the SENSEX, the returns were from a low of -6% to a high of 28%, proving that Long term SIP’s are not risk free.

 

How we can make it at our advantage?

Select the top performing schemes for investment and let the SIP done only for 12 months. After 12 months, check whether the same schemes continue to lead, if not, move to the next best scheme. The existing investment shall continue to be invested until the last SIP clears the exit load factor, then move the funds to the prevailing top performing funds.  Rarely do Mutual Fund schemes continue to be top performers for more than 12-15 months, leaderships change as the markets move.

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This activity will force a person to review his investments at least once a year and also ensure that the growth is healthy. If there is a prolonged downtrend in the markets, one can even move from Equity to debt and return back to Equity when the bullish sentiments comes back, which will require a little extra knowledge to do, which your fund manager can help you with.

So, any investment, if left for a longer period assuming that it will grow on its own, will only give average returns, which will mostly match the prevailing bank rates and would always be below the inflation rate.