Post BREXIT…..

brexit

BREXIT was a shock to the markets on Friday morning because markets closed pretty much positive on Thursday. The sharp recovery after the shock in the same session though gives a relief that there is not much damage caused; it has shaken the beliefs of the traders whose activity is most needed for the markets to function.
Due to this high impact move last Friday SENSEX is likely to be on sideways range for a good amount of time. Automobile stocks have begun to move out of the portfolio because Europe was a bigger market for this sector.
Our markets are stronger when compared to the other emerging markets which will force fund flows that will keep the prices rising. There can be new sectors and leaders in those sectors that will begin to dominate in the performance in the coming months.
Infrastructure stocks are showing strength on their balance sheets as well as on their stock prices. There are likely chances of the Infra sector taking lead in the next rally are higher.
In our portfolio, though we have been adding new stock and increasing exposure, having a near 60% exposure into Equity and the rest of the capital parked in debt is helping us protect the impact of volatile market moves.
For the month of June we have had 2 negative news flows, Raghuram Rajan exit which was a kind of shrugged off and BREXIT which had a hit. Like how we have day and night in a day, markets also should have ups and downs, only then the fatigue of the earlier day can be overcome and new opportunities can be identified to have stronger growth to our savings.

SENSEX risk and reward.

btt-sensex

If someone is rich (filthy rich), chances are that all of their riches came from Equity Investing. Either they own one or many businesses or have invested in some companies and have stayed on with it. Generally people shy away from Equity investing due to the fear of loss to their capital. This fear is due to either their own experience or through other people’s sharing of losing experience in the markets.

It is true that a lot of retail investors lose money is stocks; the reason is not the markets. It is because of the approach. Most of the times, it is because of the fear of losing, even before approaching the asset, that attracts the losses. Many a times a person does not know the reason for investing in a stock. Just because someone close to them have told them about the stock, they go ahead and park their hard earned money and when the stock goes down, which invariably happens, the reasoning will be, “it has to happen, when I have invested, how can it go up. Always it happens.”

Holding gets exited after suffering a lot of pain due to losses. Then, they shy away from the markets when it goes up again. The same fear makes them wait for more and more confirmation. Again when media begins to talk and they begin to hear from their friends and near ones about their big gains through some stocks. They venture again, when there is news about big gains already made, left over gains are lesser and signs of weakness have already set it. Which, most of the times is not known to the fearing investor. After getting in the markets begin to slide, again the story repeats.

The other reason for losing is “GREED”, just because there is a great opportunity to make money in the markets, people want to take high risk & get all that is possible from it. One transaction would have given a good profit, while they would have made only small money. The experience of profit will make them take the decision to invest all the money they have and sometimes even borrowed money. The motive is to make big or very big gains in few transactions. After investing, even a small negative move will shake their belief, not because the stock they invested lost heavily, it is because their exposure is so heavy. Once the mind balance gets lost, everything that follows will be against their wishes.

In reality, stock markets are, one more asset class like Gold, FD, Real estate etc., it has the advantage of giving the highest returns, while not always in short periods. Stay invested for a longer period, the returns will for sure be very high. Due to volatility in the price moves there is risk in this asset, for that matter any asset has a risk quotient in it. Only that it is a little more in Stocks and that is the reason the returns are also high.

Some data on what is the risk in the markets and how it can be taken at our advantage:

In shorter durations the risk of loss can be as high as 50%, while at the same time if the period of being invested increases, the risk goes in the opposite side, it gets reduced.

The chart below shows that if we stayed invested for 7 years, the chances of our capital getting negative is zero. That is, if a person invests 10 lakhs in the SENSEX stocks and stays invested for 7 years, the chances of his 10 lakhs getting negative is zero.

7th Year Zero risk

Similarly, staying invested for 10 years and above gives an average return of 12% per annum. There is an 80% chance of achieving this.

10 year rolling

SENSEX goes through changes once in 6 months, most of the times 2 of the index stocks get replaced with a new stock. If such a low turnaround index can give 12% without any effort, a little extra effort to churn and manage the portfolio, the chances of better returns is higher. Another advantage with Equity investing is that, long term capital gains are not taxed.

Equity is the only asset which has the highest return possibility along with liquidity, take advantage of this asset class. Any individuals investment portfolio should contain some percentage of Equity exposure in it, so that the overall returns can beat inflation.

NBFC leadership & our position in it…..

running-horse-black-white-2

Banking sector went into a turmoil following NPA’s and bad asset management. Public Sector Banks went out of investor favor. The Private Banks which always commanded rich premium among investors too began to lose attraction because of more and more regulations tightening their hands on growth. While all this was happening and keeping the financial sector at the razors edge, NBFC’s went to become leaders in the financial sector with phenomenal growth in their valuations.

The reasons behind NBFC’a gaining strength were –

  1. They are healthy on NPA’s.
  2. March quarter profit growth was 32%, while private banks had 23%.
  3. Home loan portfolio increased by 12%, all of it grabbed from the private banks.
  4. Focused approach made them best placed to grab opportunities arising from the base of the pyramid.
  5. Bountiful monsoon that is expected this year is likely to boost rural income, where NBFC’s are well placed.
  6. Most of them are positioned in the lower income segment, where the budget provision of more deduction on interest payment for the first time home buyers for loans upto 35 lakhs, came to their advantage.

Investors moved away from richly valued private banks to NBFC’s which shows in their stock growth in the last 1 year. NBFC’s had registered between 20 – 60% growth in the last 12 months. Toppers among them are Chola Finance, GIC Housing, Repco Home, Shriram Transport, Canfin Homes, Bajaj Finance etc.,

In our portfolio, 22% percent of the total equity exposure is in the financial sector and we do not have any banks in our portfolio. We hold all the top names along with stocks like SKS Micro, Edelweiss, which have shown good growth in their top line and bottom line. Our entry into these stocks was fairly early, giving us the edge to capitalize on their growth. Most of our investments have given above 15% growth since we have invested.

As an automatic process, our research identified the stocks in this sector for our investments.

Rajan’s continuation and the markets

Raghuram-Rajan-3

Central bank direction on interest rates both national & international always used to be big expectations and directions of the markets would take course after the announcements. For the first time in the history of our financial markets, expectation was not on interest rates.  It was the governor himself who became the news, the expectation of Raguram Rajan’s continuation as the Governor for the second term became hot.

Press had a joy ride, at least which was what Rajan told in the press meet when asked about the rumors. It is strongly believed that he will continue as governor for the second term, still there are some weak hands which are speculating and are wanting to en-cash on the rumors.

After all why would he not continue, financial markets world over has regarded him as the very best central bank governors in the world today. Very few can match his experience, expertise and knowledge. As a country too none of us would want to lose a person of his caliber. The day he took over as governor in 2013, financial markets turned for good and has been continuing. A lot of bold decisions like the cleansing of the PSB’s would not have happened, if not for him.

It is because of this cleaning that NBFC’s became attractive and companies like BAJAJ Finance, SKS Micro, Chola Fin, etc have had very good price rally. Automobile, Pharma and many more sectors benefited. We do have some of the above businesses in our portfolio which have been making good gains.

He will continue for sure and India is going to see one of its very big growths happening in the next 3 years. And probably, after that, move ahead to become a developed economy. All of it will happen not only because of Rajan, it is the whole circuit of people who have lined up along with Narendra Modi, economic conditions, business just in the cusp of a great growth.

Be invested in the India story; make a killing as the time is ripe.

May 2016 performance

Screen Shot 2016-06-03 at 3.55.03 PM

Performance of our portfolio is trailing the benchmarks in the 1 month to 6 month period. The broader benchmarks like the SENSEX have done better because of the Large Cap stocks that have had good increase in price, following their results announcement. Most of them have shown increase in profits, while sales numbers are yet to catch up.

Public Sector Banks (PSB’s), that have become untouchables in the last one year, have after the sharp clean up done on their balance sheets, getting rid of NPA’s, now showing good upward price moves. This turnaround in the PSB’s is not because of positive growth in them, it is just that, they have cleaned themselves and going forward, the expectation is that the performance will be good. Bank stocks have moved up on anticipation of better results in the coming quarters.

Turnaround is just happening and it should take another quarter or two to show up on the top line of companies’ performance. We have been adding stocks to our portfolio, following the March 2016 results. Our portfolio was moved out of stock exposure when the markets turned weak, and presently with new additions in the Paper, Sugar and NBFC sectors, our exposure have moved up to just above 50% and soon it should be reaching full loading.

Stocks like Balrampur Chini, Bajaj Holdings, Chola Finance, Bajaj Finance, DCM Shriram that were added in the last fortnight have been doing very good and going forward, these businesses are expected to give stronger growth to our portfolio.

We invest only in those business that show both Sales and Profit growth, hence, our portfolio does not carry Large Cap stocks in the current market, while we will be adding stocks that show strength, unbiased on the category or sectors.