Vijay Kumar Gaba

 Wishing all readers a joyous New Year, and a brilliant 2021 ahead. Stay Healthy, Stay Blessed.

Top performers of 2020

In this last post of 2020, I would like to pay my tributes to those, who in my view are top performers of the year. Many readers may find it deeply personal view, totally unrelated to the investment strategy. However, I keep these at the core of my investment strategy. Without these performers, making any case for investing in Indian equities would be tough for me.

Migrant Laborers

One section of the population that has been hit the hardest by the pandemic is migrant laborers. These people mostly sustain on daily wages and have negligible savings. On announcement of lockdown, these people lost their livelihood, shelter and savings in no time. The uncertainty over resumption of normal life forced them to leave “unaffordable” cities and return to their villages. They got almost no support from the baffled and paranoid administration or industry. Numerous cases were reported where the workers walked hundreds of miles to their villages. One 15yr old girl famously carried her ailing father over 1200 kilometers on bicycle, from Gurgaon to their native place in Bihar. Unfortunately, all were not welcome in their homes also. In many cases the folks there saw them as competition and threat to the property.

The most commendable part of this story is that millions of distressed workers migrated back under severe stress and inhumane condition, but no significant episode of violence or looting was reported from anywhere in the country. To me it is a matter of great comfort. This indicate low probability of any major violent civil or industrial unrest in the country.

Women

The women, especially the working women who share the burden of running household with the men, also did a commendable job during the year. These women brilliantly managed the stress of managing household chores without any domestic help and significantly higher domestic workload, work from home, tighter budgets, stressed men and children. Numerous cases of domestic violence were reported against women, but they valiantly withstood all the pressures and performed way beyond their duty.

The quintessential Indian woman provides a strong pivot to the Indian economy. So long this pivot is unshakable, one can expect Indian economy and society to sustain.

Health workers

It is widely recognized that India is awfully short of qualified health workers. The ratio of population per health worker in India ranks amongst the lowest quartile of nations. The pressure on health workers during pandemic was incomprehensible. Nonetheless, the health workers across the country did a commendable job, risking their physical and social life. They tirelessly worked around the clock. They managed the deluge of patients and violent behavior of patient’s relatives rather brilliantly. The research workers toiled round the clock to develop the vaccine for deadly virus in record time. Many health workers reportedly caught the infection and lost their lives.

The availability of high quality health workers provides comfort. The enhanced awareness about their need and importance shall result in policy initiatives to improve their availability and accessibility. Access to affordable quality healthcare shall support the economic growth in next decade.

Learners

The lockdown impacted the students in the worst possible way. The schools were closed and students were forced to stay indoors. The corporate training programs were also impacted adversely due to mobility issues and paucity of funds. The pace at which the learners and trainers shifted to the digital medium is remarkable. Students even in remote areas were famously shown as making tremendous effort for adapting to digital teaching. Numerous people took advantage of lockdown and updated their skills using digital platforms. Thousands of learners reportedly took advantage of online courses offered by global universities like Harvard and upgraded their skill and knowledge base.

Though, it has temporarily increased the digital divide in the society with the lower economic strata feeling left out. Nonetheless, this has shown a path how India will be able to materially enhance its education, skilling and training initiative using digital platforms. The shortages of teachers and other resources will be obviated through affordable technology in next few years only. No one would need to go in expensive universities abroad just for the sake of acquiring knowledge. The global classroom has come to our digital devices. Nothing could be more encouraging for a growing economy.

Deliverymen

When the entire country was locked down and people were fearful for moving out of their homes, millions of deliverymen kept the country running. Risking their life, these deliverymen delivered essential items like food and medicine to every household even in the remote parts of the country.

These deliverymen form the backbone of the evolving retail trade. Ecommerce is inarguably the sunrise sector of the economy; and it cannot be imagined without deliverymen. One could find numerous workers who have been left redundant due to closure or downscaling of business, finding support in this occupation.

Unfortunately, this segment of the workers still remains mostly unorganized and exploitive. Hopefully we shall see the Ecommerce policy taking note of critical role played by this segment, and provide for their better social security and working condition.

Chart for the day

Some food for thought

“It is not the healthy who need a doctor, but the sick. I have not come to call the righteous, but sinners to repentance.”

—Jesus Christ (Spiritual Leader)

Word for the day

Amity (n)

Friendship; Peaceful harmony.

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The year 2020 has been a period of extremes for markets. During past 12months, the equity markets have kept swinging between extreme fear and greed. The year began on a buoyant note. The benchmark indices scaled their all-time high levels on 24 January, after rallying for past 4 months. In the following 2 months the indices corrected ~40% from their January highs, refreshing the fading memories of 2008 crash. A sustained rally thereafter saw the benchmark indices scaling new highs in next 9 months. This rally was remarkably different from September 2019-January 2020 rally in terms of volumes, market breadth, and participation. Foreign investors and domestic household investor have been notable buyers in 2020 rally, while the domestic institutions have been net sellers.

In my view the top 10 highlights of the performance of Indian equities in 2020 were as follows:

1.    Though benchmark indices indicate that mid and small cap indices have done materially better than the benchmark Nifty; the market breadth has not been encouraging. Relatively less represented sectors IT and Pharma outperformed strongly, while the most represented financials and energy were massive underperformers.

2.    Market breadth was positive only for 5months, while in seven months market breadth was negative. March 2020 was the worst month and August 2020 was the best month in terms of market breadth.

3.    Indian equities were average performers, in comparison to the global peers. However, it underperformed its emerging market peers notably.

4.    A lot of discussion has taken place around the strong foreign flows into Indian equities. It is however worth noting that foreign investors have invested close to Rs48,000 crores in Indian equities during 2020. But most of this has come as switch from the Indian debt. The net foreign flows to India in 2020 are marginally negative.

5.    The long term Nifty return (5yr CAGR) is now consistent around 11-12% for past five year. Only 2019 was an exception with 8% long term return. This is the longest stretch of consistent returns. This highlights the maturity of Indian markets; and also lesser probability of exceptional gains in near future.

6.    Nifty averaged around 10985 in the year 2020. This is about 4% lower than 2019 average. During previous two crisis periods (2001-2002 and 20008-2009), the fall in yearly average traded value of Nifty lasted for two consecutive years. But the third year saw strong recovery in the average traded value. If the history repeats, the Nifty may average below 10985 in 2021.

7.    The market saw sharp rise in speculative trading activities during the year. The percentage of total shares traded to the shares delivered fell from 20.5% in March to 15.05% in June. However, it has again improved to 19.6% in November.

The net new money invested in equity trades (NSE net pay in) was highest in March 2020 when the market correctly sharply; implying that the first fall bought aggressively. May-June also witnessed higher new money.

The size of average trade increased to Rs32462 in November 2020 from the low of Rs22314 in March 2020; implying that the smaller investors are now less active in the market.

8.    After losing ~30% in 1Q2020; Nifty gained ~20% in 2Q2020; ~9% in 3Q2020 and ~20% in 4Q2020. The gains in last three quarters have come without any correction. Only the month of May2020 has yielded negative return of (-)2.8% since April 2020.

9.    Despite the crises and sharp correction in the market early in the year, the volatility has not spiked like the previous two crisis periods. Consequently, the arbitrage funds have sharply underperformed, yielding less than the liquid fund returns. Gold ETFs outperformed most of the equity fund categories.

10.  The Nifty earnings have seen a spate of upgrades in recent weeks. However, normalized for the base effect of FY21, the growth continues to remain anemic. Most of the appreciation in equity prices therefore could be purely due to PE rerating to factor in lower interest rates. This implies, interest is perhaps the single most critical factor to watch in 2021. Any sign of hike in rates could result in sharp correction in equity prices.

 The two thousand twentieth year of Christ is coming to an end. This year has been totally forgettable and remarkably transforming at the same time. It reminds me of the title of the autobiography of legendry poet Dr. Harivansh Rai Bachachan – “क्या भूलूँ, क्या याद करूँ”.

Notwithstanding the all-time high levels of stock market indices in most countries; the global financial system inundated with trillions of dollars in free liquidity; over US$20trn worth of bonds yielding negative return globally; the massive economic and social shock of Covid-19 pandemic has left billions of people in distress. The inequalities of income, wealth and opportunities have risen to new highs.

Significant developments have been reported on the front of vaccine development to check the spread of Covid-19 virus. Many countries have already authorized emergency use of some vaccines; and people are being administered such authorized vaccines. Nonetheless, recently a fresh wave of mutated version of Covid-19 virus has been reported from some places in Europe (especially UK), resulting in fresh set of mobility restrictions. This indicates towards the possibility that the world may not return to total normalcy in many months to come. As per various estimates, it will take 15-18months to inoculate a sizeable population to reach a stage of herd immunity against the Covid-19 virus.

On the positive side, the pandemic has accelerated many trends that may help the cause of sustainable faster development in the medium to long term.

There have been many events in 2020 that must be taken note of by the investors. However, as a tine investor in Indian assets, I would in particular like to remember the following eight for next many years.

1.    The Indian government imposed a total socio-economic lockdown in the country in the wake of the outbreak of pandemic from 25^th March 2020. The restrictions were relaxed gradually from June onward.

In my view, it is almost impossible to assess the utility and true impact of lockdown exercise. We would never know, what could have been the situation if a total lockdown was not imposed in March. It could have been worse in terms of economic and health shocks; or perhaps the economic loss could have been less pronounced, sans total lock down.

This episode however has further strengthened my already strong view that the incumbent government is unpredictable. It can take decisions having far reaching repercussions rather quickly; without adequate planning; and without bothering about the immediate consequences in terms of human suffering. I shall continue to incorporate this feature in my investment strategy for midterm.

2.    During the lockdown, when the human activities and mobility were restricted to a great deal globally, the nature attempted to reclaim its space. The instances of peacock dancing on city streets, deer, sheep and even lions roaming freely on public roads, air quality improving to “serene” from “severe”; visibility improving to few hundred kilometers from few meters; children learning that the color of sky is “azure” and not “pigeon blue”. However, within 15 days of unlocking, the human reclaimed the entire territory from the nature.

Notwithstanding the enthusiasm behind sharing pictures of “pure nature” on social media, it is clear that we have moved too far on the path of self-destruction.

On the other hand, “work from home” and “digital meetings” have been adopted as fait accompli by many businesses. This because it brings immediate tangible benefits to both, the employer and the employee.

This leads me to conclude that any global agreement on climate will not succeed unless it has immediate and tangible economic payoff for the parties. The Paris accord, fails on this test, just like the Kyoto protocol. I shall therefore not be looking for investment opportunities in Paris accord, unless I see tangible economic gains for Indian businesses and consumers.

3.    On 20^th April 2020, something happened in global commodities market, which was unheard of. The WTI Crude Oil Future in New York crashed to a negative US$37.63 price. This event, though rare, has added a new dimension to the risk management process; option pricing methods; and trading strategies.

4.    The benchmark crypto currency “Bitcoin” has been vogue since 2009. Even though it was accepted as a medium of exchange in many jurisdictions, it never gained wider acceptance as legitimate asset like gold or store of value like currency. In 2020, most of the reputable global investors and strategists have accepted Bitcoin as futuristic “store of value”, just like gold and USD. This acceptance has come on the back of Bitcoin’s sharp outperformance vs precious metals and USD. I believe that this marks the beginning of a new era on global monetary system. Neutral digital currencies shall continue to gain prominence in global monetary system in future. May be this prominence would diminish the dominance popularity of gold and USD as global reserve currencies.

5.    The year saw a brilliant thaw between the traditional enemies the Arabs and the Israelis. Some strategic initiatives were taken by Israel, UAE and Saudi governments to reduce tension in the region. This also saw Arabs increasing distance from Pakistan. I see this as a good omen. It may result in sustainable reduction in terror support and funding globally. However, this has pushed Pakistan closer to China. The tension at Indian northern, western and eastern borders may sustain and even increase in short term. More frequent hostilities at borders  is something we would need to incorporate in our investment strategies.

6.    Reliance Industries, led by Mr. Mukesh Ambani managed to convince global business leaders like Facebook and Amazon, and investors like KKR, Carlyle, GIC, ADIA etc to invest in its digital and retail ventures. Global petroleum majors British Petroleum and Aramco have also committed large investments in fuel business of the company. If these investments are consummated successfully in next 2-3years, we shall see many large Indian businesses gaining attention of the global business leaders and investors. I shall be reevaluating some of the large, viable but heavily indebted businesses from this viewpoint.

7.    First protests against the Citizenship Amendment Act (CAA and Shaheen Bagh) and now protests against the three acts to reform the farm sector in the country have further strengthened my belief that the mistrust between the ruling BJP and opposition parties has breached the red line. The political environment shall get further vicious, once the BJP tries to conquer the Forts of East (West Bengal and Odisha) next year. I shall not be expecting political consensus on any issue for next few years, for my investment strategy. Although with Congress weakening further, getting majority votes in Rajya Sabha may not be an issue for the government, nonetheless, the threat of reversal of contentious legislative changes shall always prevail, should a united opposition manage to dethrone BJP in 2024. (I agree that as of this morning this looks almost improbable).

8.    India recorded its first recession in past four decades in 2020. Though many analysts are terming it a technical recession due to lockdown; I would like to wait and see the trajectory of recovery to conclude if a lasting damage has been caused to the growth prospects.