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Monday 7 January 2019

ET Article: The Year Gone By

As we head into the new year, here is a look back to the year that was.

In 2018, markets have seen a strong correction, especially in the mid and small cap space, which is not visible in the index numbers. This has meant that most investors have lost money during the year. We can attribute the fall to many reasons. In my opinion, it was high valuation, lack of growth in earnings and money outflow that contributed majorly to the fall. FIIs sold throughout the year ending the year with outflows of 23,769 cr from equity and 51,328 cr from debt markets. This resulted in pressure on the currency. The rupee fell from 63 to about 70 to the dollar during the year and touching 74 in between. Oil prices spiked during the year scaring a lot of investors and economists spelling doomsday, but eventually came down lower to around $50 / barrel from the beginning of the year when it was around $65 / barrel.

We also saw some very important moves during the year. The bankruptcy code got implemented. The progress has been slow but hopefully will lead to long-term changes in the promoter behaviour as they stand to lose their companies in case they do not service their debt on time. We also saw a beginning of PSU bank mergers with the SBI merging the associate banks into itself and the announcement of the Bank of Baroda, Dena Bank and Vijaya Bank. The migration of banking from PSU to private banks is a consistent and long-term process and in future may end up with only 3-4 large PSU banks able to survive and the rest to be merged into them. SBI, Bank of Baroda, PNB seem the most likely candidates in that list.

The year also will perhaps be remembered, atleast for some time, for financial misdemeanours of the PNB scam and IL&FS collapse, resulting in a large sentiment change for the NBFCs. The NBFC space had heated up with a lot of new entrants starting their own NBFC businesses in the last couple of years. 2018 saw an end to those adventures. From now on only the strong, well capitalised, prudent and niche lenders would be able to thrive and grow their business.

Globally, FAANG stocks have seen an interesting year.  Apple and Amazon touched a trillion dollar market cap before correcting significantly by the end of the year. Apple is slowly going downhill, as they are not able to create any new products. For the first time, their reluctance to share new release product sales highlights the fact that their sales are losing steam. They are holding on to their margins by increasing prices, a strategy which has a low shelf life. Buffett's large sized bets, first on IBM and now Apple, shows, that he was probably right in avoiding tech stocks all these years as they were outside his circle of competence!!

Facebook has had a tumultuous year, with issues regarding piracy and data access to platforms like Cambridge Analytica. Regulatory risk seems to be very high for Facebook at this time.

Netflix continues to invest humungous amounts of money, 2018 budget was close to $8 billion, with around 85% pumped into original content. Being personally a movie and TV series binge watcher, I have a vested interest in their doing well!!

Google continues to be perhaps the only "irreplaceable" company for now. It is fully integrated into our lives. Search, YouTube, Maps, Android, Chrome are all de-facto choices for most people across the globe. The inflexion point will be when they try to monetise their non-search products like YouTube. That is when we will truly know the brand pull or if people are quick to migrate away to another similar product.

Back home Reliance Jio has completely disrupted the telecom space by ushering in dirt cheap data. This new data access is already changing behaviour patterns for a lot of people. I see people around me consume a lot more entertainment on their mobile devices now than ever before. A lot of my younger friends have completely moved away from watching TV. We have already seen completely new industries like food delivery and taxi apps come up over the last few years which has piggy-backed on this convergence of cheap data and smartphones. Over time, this behaviour will pick further momentum and a lot of industries will have to adapt themselves to the new way of doing business.

Another factor unfolding over the last few years and which took a spotlight in 2018, was what I term "hyper-nationalism". Leaders like Trump epitomise this phenomenon. This is a long shift and takes decades to fully play out. The world is now becoming more and more "selfish" as resources like jobs become fewer and the world population continues to grow. Countries and people will become more and protectionist and pandering to their local polity. And it may take years to reverse this trend. This will redraw corporate and trade structures as we know it. Expect to see lot more legislation and rules which will pause the free-flowing globalization of the last 2-3 decades.

Coming to the Indian markets, 2019 looks a promising year, as do all years. As the famous Chinese saying goes, may we live in interesting times!

 This article appeared first in Economic Times on 7-Jan-2019 at https://economictimes.indiatimes.com/markets/stocks/news/learnings-from-a-year-when-even-buffett-was-caught-on-wrong-foot/articleshow/67417855.cms

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