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Monday 31 December 2018

ET Article: Investment strategy for election year? Just don't think too much!

2018 has been a very testing year for equity holders. Investors in midcaps and smallcaps have bled profusely. Largecap indices, with the exception of a handful of stocks, have also gone down. This is normal. Equity returns are not linear. Equity as an asset class does not give steady, regular returns. 2017 was a year of super-normal profits. On a two year timeframe investors have still made positive returns. It is the recency effect and the availability bias which plays tricks with our minds and makes us feel that the markets have let us down!
I will not hazard a guess on what the market will be like in 2019. Not because I don’t want to, but simply because I don’t know how to. I know at this time of the year, it is fashionable and probably expected to prognosticate about the next year, but I will refrain from that. Instead let me talk about a few important things that we should keep our eyes out for.
Firstly, let’s talk about the elephant in the room and get it out of the way - the general elections. Historically, Indian markets have had large swings immediately before or after the general elections. However, if we have a 2 year view, elections and its results don’t matter much. In 2004, the Nifty went circuit down post-elections, and yet the market went on to have a great bull rally for the next 3 years. Exactly, the opposite happened in 2009. The market went circuit up and then did not do much for the next 2 years. In the US elections, when Trump won, markets where expected to crash, yet it rallied. Recently, in the state elections, the ruling party lost in 3 of the major states yet the market went up instead of falling as was generally expected. I would argue that not only is it not possible to figure out election results, but it is not important to do so for investing.
Next is the US-China trade war. It is something which is too difficult and complicated to be able to infer its implications. One thing in India’s favour is that most of India’s economy is domestic-consumption driven and not dependent on either US or China.
Oil prices can destabilize our economy to a great extent. How it behaves in 2019 and beyond needs to be on our radar as investors because it can impact the currency and interest rates. We, as a nation, need to start actively looking at renewables and reducing our dependence on oil imports. 2019 is a year as good as any to get started on this.  
Job creation in the age of increasing automation is going to be an ongoing challenge. India needs to be able to support its huge population with jobs. We are in a peculiar situation with a scarcity at both ends of the spectrum. Industry doyens keep talking about unavailability of employable people and on the other hand our youth have no jobs. Should we be focusing on vocational training instead of trying to push everyone to get a graduation degree? What about the quality of education being imparted at various levels?
While these have nothing directly to do with equity investing in 2019, tackling these problems by an enterprise can provide long term mega-themes.
India is a 2.5 trillion dollar economy today. At the current pace, we should double in 8-9 years and then double again in another 8-9 years. In this while, market cap should also go up substantially from current levels because a lot more of the large unlisted players would come to the capital markets through IPOs. At a 100% market cap to GDP ratio, we are looking at approximately 10 trillion market cap in 16 to 18 years.  That is a 5-fold rise at the market level in that time frame. Individual stocks will definitely do much better. So, keep an eye on the longer term wealth creation stories, be invested in a well-chosen portfolio of stocks and fasten your seat belts for a bumpy ride on the way.

This article first appeared in Economic Times on 1-Jan-2019

1 comment:

  1. What an informative article and i am impress. We'll apply this investment strategy ;) Congratulations!