Do it yourself

·         First, on top of the 50bps cash reserve ratio (CRR) cut in December 2024, the Reserve Bank of India (RBI) announced further infusion of ~Rs1.5 trillion of sustainable liquidity in the banking system.

·         Second, the finance minister Rs one trillion personal income tax concessions, benefitting over 20 million taxpayers.

·         Third, RBI embarked on a rate cut cycle after a long 24 month pause, with a 25bps cut in the policy repo rate. Besides, the RBI also decided to defer the implementation of stringent Liquidity Coverage Ratio (LCR) and project financing norms, which would materially constrict the lending ability of the banks, to at least the end of FY26.

In normal circumstances, this combination of monetary and fiscal stimulus would enthuse the financial markets by igniting the risk appetite of investors and traders. However, this time the markets have mostly ignored the stimulus measures. After some momentary excitement, the markets (equity, bonds and currency) are mostly continuing with their weak trend.

·         Benchmark equity indices are back to their pre-budget levels. Even Nifty Consumer and Nifty Bank – the sectors that were supposed to be primary beneficiaries of the fiscal and monetary stimulus are trading almost at pre-stimulus levels.

·         The benchmark bond yields are back to the pre-budget levels.

·         USDINR is weaker by over one percent in the past couple of weeks.

·         Foreign portfolio investors (FPIs) are persisting with their exit strategy, and have been net sellers in India (including equity and debt) during the months January and February.

·         Stock market volumes are much below one-year average levels.

Obviously, the present circumstances are not normal. It is therefore worthwhile to examine whether Indian markets are passing through a “bear phase” or it is just a “pause” in a secular bull market or a “corrective decline” after a strong bull market. In my view, it is critical because the investment strategy response to these three scenarios is usually very different.

·         In case we are in a bear phase, the strategy should be to underweight risk; focus on safeguarding capital rather than return; orient portfolio towards larger, stronger companies that are more likely to survive through a prolonged rough patch; completely avoid leverage; and consolidate holdings into fewer strong companies.

·         In case it is just a pause, in a secular bull market, the strategy should be ignored the noise and hold on to the growth stocks. This opportunity may be used to rebalance the portfolio for any excesses and deficiencies.

·         In case it is a corrective decline after a strong bull run, investors/traders should be continuously looking for excessive negative price action in good stocks and use the opportunity to buy more using leverage; and overweight risk.

More on this tomorrow.

After a decade, the price of his plot is up by some 300%. He is happy that he made a very good investment decision.

When I pointed out to him that Dehradun is no longer the peaceful, clean and cheap city it used to be ten years ago. Therefore, his investment premise has mostly failed. Besides, the land prices in many areas of the NCR have risen equal to or more than Dehradun in the past one decade.

The point to ponder over is if you earn a good return on your investment in spite of your assumptions behind making such investment proving to be wrong or inadequate – would you consider yourself to be an astute investor, even eligible to advise others, or just plain lucky!

To emphasize my point further, let me give you some more pertinent examples.

In December of 2023, many investment advisors advised their clients to invest in long duration bond funds. The primary premise underlying their advice was that the US Fed shall start cutting rates from February and the RBI shall follow the suit.

However, seven months later, neither the US Fed nor RBI have cut rates. The visibility of a material rate cut in 2024 has diminished considerably. The US benchmark 10yr yields are higher by 15bps YTD. Regardless, the benchmark yields in India are lower by 20bps. Long duration bond funds have, on average, yielded a very good return of ~7% YTD.

You tell me, if the investors who invested money in long duration bonds were smart or plain lucky?

Extrapolating this to equities, at the beginning of the year 2024, most brokerages projected an earnings growth of 17-20% for FY25-FY26. They expected buoyancy in capex, especially private capex. Massive growth was projected for the sectors like Railways, Defense, Power, Banks and Construction (especially roads). IT Services was forecasted to be the worst sector for 2024, in terms of earnings growth. Commensurate with these projections, ambitious price targets were set for industrials and infra builders.

After six months, the actual performance earnings and order flows are at divergence from the analysts’ projections. The 300 odd companies that have declared results for the 1QFY25 so far, have reported an average profit growth of less than 5% and sales growth of ~10%. IT Services companies have performed reasonably well. New project awards for roads and other infrastructure projects are much below projections. Power, Defense and railways sector companies have reported below par results. The Economic Survey has expressed concern over the private sector’s muted response to the government incentives and not doing enough capex in manufacturing capacities. Regardless, the stocks of these companies have recorded stupendous gains.

One defense sector fund has yielded return in excess of 115% in the past one year. My point again is whether these investors are plain lucky to have earned good return on their investments or they planned their success?

Also, the advisors, fund managers and analysts who made wrong assumptions but nonetheless performed well on returns deserve the credit for their performance or need to be questioned for their poor analysis?

In my view, Luck cannot be the primary factor in an investment plan. A good investment plan shall focus more on the process, fundamentals and accuracy of the assumptions rather than the price action, in the near term.

Remember, when the “experts” run out of luck, they would hide behind the excuse of “mean reversion” for their poor performance. As an investor you may not have that luxury.