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Thursday 28 December 2017

2017: Year in Review

2017 was an interesting year, both for the markets and for the world. India saw a major tax reform in the rollout of GST. Along with last year’s demonetization, it resulted in a definite slowdown in business performance, where companies took time to adjust themselves to the new way of doing business. Globally, tensions rode high with North Korea and US presidents taking potshots at one another.

Bitcoin became the rage this year. At the time of writing this, it has already risen more than 15 times. A lot of my friends have asked me about how to invest in them in the last one month, which gives me an impression (and I could be very wrong) that we are staring at a classical bubble. Most of the signs of a bubble are visible in the way the cryptocurrencies are trading today. The fall may not come immediately, but the story is unlikely to end well for those who are coming to the party late.
In India, Sensex has gone up about 25% over the year.

2017 was fairly challenging in identifying good companies which were available at reasonable valuations. Across global markets, valuations have been fairly high throughout the year.

As an investor, I focus on generating absolute returns with a usual time-frame of 2-3 years for an investment to work out. I try to identify businesses with good management and reasonable growth that can compound well over time. Along with that I also focus my energies on identifying turnaround sectors and companies – those where things are getting from worst to bad or from bad to good.

The focus for 2018 remains the same. I continue to look for good, well-managed, undervalued mid and small cap stocks which have a promise of above-average returns.

I am a firm believer in wealth creation through equities over the long term and I think we in India are in the midst of a multi-year bull market. Some of the reasons why I think we are in a major bull market are:

i) Global liquidity: Globally, some $9 trillion of global government debt still trades at negative rates. Investors are desperate to find avenues where they can get a positive return.

ii) Domestic participation: Participation in equity through mutual fund SIPs has gone up consistently. Just a look at the numbers shows that SIPs in the full year FY16-17 was Rs 43,921 crores and in 8-months of Apr-Nov Fy17-18 is already Rs 40,780 crores! Monthly SIPs are closing in on Rs 6,000 crores per month.

iii)TINA (There Is No Alternative): With low interest rates, real estate market in dumps after demonetization and gold prices also stagnant, common Indians are flocking to the equity markets through the SIP route.

iv) Growth: India is already more than a $2 trillion economy and GDP is growing at 6-8%. This means in the next 8-10 years India will double its economy size. Just think about the implications of it. We will be adding as much to the economy in the next 8-10 years, as we currently have! The per capita income will correspondingly double as well, bringing millions (if not billions) of people out of poverty into the consuming class.

It is not as if everything is rosy. Indian demography is both its advantage and its weak point. If as a country we are unable to provide jobs or livelihoods to the millions of young people, then we are most likely going to see increased social tensions. They may come up in different forms and may not be directly attributable to economic challenges, but the root cause will most likely point to that.

Short-term government policy, taxation rules can be risky and create uncertainties for businesses and the markets as we have seen with both the demonetization and GST exercises. Global macro factors can also result in changes in market dynamics in the short-to-medium term.

Overall, the future for Indian equities looks to be bright over the long term. Like every year, 2018 will bring with it its own set of challenges. There is no way to predict how the year will pan out. The only thing for sure is that it will be volatile.

May we live in interesting times.

Here is wishing all a very happy and prosperous New Year.

Friday 8 December 2017

Weekly Reading: Some interesting stuff

A Q&A with arguably India's best banker today - Uday Kotak

Why professionals will beat amateurs in the future

Lou Simpson, former chief investment officer for Geico discusses his portfolio strategy

A logical future is for blockchain based currency issued by central banks in lieu of paper currency

Focus in the answer to superior results. And a Not-To-Do-List!

A sneak peak into the famous and controversial Paul Singer and his hedge fund Elliot Management. The article also covers how they took on Samsung and how at times their practices can border on the boundaries of ethics.