Do it yourself

The 2025^th year of the Christ is beginning on a very tentative note, particularly for investors in financial markets. The past four years have been relatively smooth for investors. With the benefit of hindsight, we can confidently claim that the markets were mostly driven by macro factors. Unprecedented liquidity infusion by the central banks and fiscal support to consumers across the world helped most asset classes to perform well.

Despite massive global disruptions due to the pandemic and geopolitical, the volatility in markets was largely contained. Since most asset classes yielded decent returns for investors, they were not really pushed hard to make choices.

However, the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make.

Choose your path carefully

Making right choices, in my view, would be the central investment challenge for the year 2025. The following situations, for example, would challenge investors to make a choice.

Promise vs. delivery

In the past few years, the Indian markets have been largely driven by the political and corporate promises, ignoring the actual delivery, especially in the matters of investments, infrastructure development, growth, and profitability. In the past few months corporate promises have started to moderate, albeit very gradually; but the government promises continue to remain rather exaggerated.

The themes like manufacturing for import substitution/export promotion, defense production, railways modernization and expansion, development of tourism ecosystem, clean energy, etc., which were mostly based on the government promise, have been popular with the investors in the recent years. The stocks associated with these themes have yielded extraordinary returns for investors.

Many businesses, especially those associated with these macro themes, also promised sustainable growth and profitability. So far, only a few have delivered on their promise. Very soon, investors would need to choose whether to continue relying on promises or shift the focus on businesses that have been delivering consistently.

Globally, the promises of the Trump 2.0 regime are becoming a major investment theme. The investors would also need to make an assessment of how much of Trump’s promises are deliverable and invest accordingly.

Short stories vs. epics

For ages, collections of short stories like Panchatantra, Jataka Tales, Aesop’s Fables, etc. have been key influencers of the value system, morality and consciousness of human beings. Very few of us would have bothered to read the full text of epics like Ramayana, Mahabharata. We know the broader plots and teachings of these epics through brief narrations by elders, TV shows and movies.

Similarly, most of the successful investors would have created their wealth by investing in some small ‘stories’. Investing in a broader macro trend (epics) requires a lot of patience, deep understanding of economics and deep pockets to weather through the macro cycles. For the impatient, small investors with low understanding of economic cycles, macro trends intermittently provide a lot of excitement. Extraordinary profits made riding popular waves, if not encashed in time and preserved, often perish in no time.

Anecdotal evidence suggests that a lot of investors are presently invested in “the epic India story”. It is important to note that this story has been unfolding since the early 1990s, and might take many more decades to fully unfold. In the past 34 years there have been many periods of rejection of this story as a valid investment theme. 2025-2026 could be another phase when a large section of investors, especially foreign investors, reject this story as bogus.

Small investors thus need to make a choice whether to stay invested in ‘the epic India story’ (macro themes like infra development, demographic dividend, rise in income & consumption etc.) or focus on finding some small stories that may yield results in the short period of time.

"MAGA" and "BRICS as a unified market with common currency" are some examples of global epics, which investors might need to accept or reject.

Jingoistic defiance vs. pragmatic escape

The year 2025 might bring many investors face to face with ground realities – social, political, and economic. Many of them may discover that their current portfolios of investment are not actually in sync with the current ground realities. Investors would need to make a choice whether to stay committed to their current asset allocation and investment portfolios; or make a strategic change and bring the portfolios in sync with the latest ground reality.

This may, for example, require rationalization of tactical debt allocations made to take advantage of sharp fall in bond yields; evaluation of gold allocation made in anticipation of easing bond yields & rising geopolitical tensions; and investment in traditional FMCG businesses which are facing margin & growth challenges.

Absolute vs relative return

With a material rise in the investments made through professional investment managers (MF, PMS, AIF etc.) in the past four years, investors have become used to assessing the performance of their investment portfolios relative to the benchmarks set by these professional investment managers. The relative return argument (or “strategy” if you prefer to use this jargon), functions well only if the benchmark continues to provide positive returns consistently. For those investors who are depending on their portfolio of financial investments to meet key goals of their life, e.g., financial freedom and retirement planning etc., a couple of years of negative return could spoil the entire math.

The investors whose investment objective involves any one or more of the following ought to prefer an absolute return strategy, instead of a relative return argument. For their investment objective would invariably involve a defined cash flow over a definite period of time. Their investment strategy must therefore focus on making a reasonable rate of absolute return over the “defined” period of time. Beating the benchmark index should be the least of their concerns.

·         Retirement planning – regular income to supplement the loss of salary/wages.

·         Goal based investment, e.g., buying a house, children education expense.

·         Financial freedom - assured minimum income to allow

2025-2026 could be one such period where non-institutional investors might have to make a choice between relative return and absolute return strategy.

 For me, Diwali this year was certainly not as it ought to be. Untimely demise of many close friends and relatives in the past few months; incessant horrific news flow from the active war zones; conspicuous signs of extreme socio-economic stress in a majority of the population; and apathy of the administration towards common man’s plight and worsening law & order situation dampened my spirit of festival.

I spent the week wandering the streets, slums and villages of Delhi NCR region and adjoining districts. What I witnessed and experienced, makes me believe that blaming selling by the foreign investors for the extant pain in the stock markets is like treating “the effect” as “the cause” – which is not only inappropriate but borders foolishness.

Household inflation, unemployment (including underemployment, disguised unemployment and most importantly unemployability), lack of basic civic infrastructure (drinking water, sanitation, primary health, decent primary education, etc.), are serious challenges for even the citizens living in the national capital or in its vicinity.

It is clearly evident that household savings and consumption may continue to face strong headwinds in the short term (4-6 quarters) at least. It shall reflect on the asset quality of the lenders, fiscal balance (rising reliance on the fiscal support for food, healthcare, education, and constricted ability for revenue mobilization) and eventually slow down the capex growth. 2QFY25 results declared so far are indicative of some of these trends.

I also find the stress in household finance management manifesting in the elevated anger and anxiety in the personal behavior of citizens. A sharp rise in the instances of domestic violence; social aggression; racial & religious intolerance; addiction to drugs, alcohol, & pornography; and insolent disregard for compliance, are some of the conspicuous effects, especially in the lower strata of the population. Rise in corruption and ostentatious consumption (as an act of denial of the actual state or to deceive others) are only a couple of economic consequences.

I also gathered some pearls of wisdom during the Diwali week, which I would like to share with the readers.

End of home cooking approaching?

A reputable entrepreneur shared his thoughts on the likely future trend in the food industry. In a tweet on Diwali day, he wrote, “In my view in 2040: For every 1L population at least one “Food Factory” will operate. From it, for 5 KM radius food will be delivered at home in 10 mins by a drone or a driverless EV. 50% of the population will not use the kitchen even once a week. 80% of hotels will not exist.” Many comments to this tweet mentioned that 16 years is too long a period. This trend may emerge in the next 5-7 years. The necessity of two incomes to run a kitchen may be one of the major factors in forcing the ‘homemaker’ out of home for work.

It is pertinent to note that as per the latest Annual Survey of Industries (ASI) Factories producing food products, 16% of the total number of factories, are now the largest category of industrial units in the country. These factories employ 21,16,000 or 11.4% of the total industrial workers, more than any other industry. The traditional largest employer, textile industry, comes a distant second employing 17,23,000 workers. (see here)

It would be interesting to see what changes the kitchen appliances industry would face due to this emerging trend.

Gulab Jamun is real villain not Soan Papdi

In the past decade or so, the Soan Papdi memes have become an essential part of the Diwali festivities. Once a cherished delicacy, a traditional sweet Soan Papdi has become a joke for everyone, as the modern health-conscious find this particularly sweet very unhealthy and prefer to pass it to others instead of consuming it themselves.

A sweet-maker (Halwai) in Hathras town in Uttar Pradesh educated me on this. As per him, if properly made, Soan Papdi is actually not unhealthy. It is made of besan (gram flour) which is protein rich and not deep fried. On the other hand, the worst sweet is Gulab Jamun – Maida (refined flour), deep fried (mostly in extremely unhealthy reused palm oil), and soaked in sugar syrup for days. It has no nutritional value and tons of ill effects. So, the next time you gulp a savory Gulab Jamun, please be mindful.

Kiwis whitewash the men in blue

The Indian men’s cricket team lost their first test series in India after 2012, after 18 consecutive series victories. The New Zealand team defeated India 3-0 in a three-test series. The worst part is that all three tests were lost very badly. For example, on the third day of the third test, India needed just 146 runs to win the test. On home ground, for a team that bats right till number nine, it should not have been very hard. If only the coach had told all the eight batsmen that “they need to score 19 runs each, and they have 25 overs each to achieve this task. There is no rush and no need to hit boundaries.”

I think all the young investors, who have started their investment journey in the past four years, could draw an important lesson from this. They need not chase the stocks that hit daily limits frequently. They just need to find 10 companies that are most likely to grow their earnings @15% CAGR for the next five years. Investing in these companies may double their capital in the next five years. It is as simple as that.

Internecine celebrations

The residents of the national capital blew up billions in burning firecrackers on Diwali night, despite the dangerous level of air quality, sick children and old parents in their homes, a government order prohibiting non-green crackers, and stretched finances. They offered the most ridiculous of the arguments to justify this act of assured mutual destruction.

In all their sincerity, they believed that by doing so they are (a) protecting their religion; (b) telling other religious communities their true place in the society, and (c) rebelling against the government’s minority appeasement policies.

Little did they realize that (i) they have burned their hard-earned money; (ii) added more poison to the already poisonous air; (iii) poisonous air does not discriminate between Hindu and Muslim lungs & brains, and it would kill both equally; and (iv) the people who claim to be more fierce religious warriors come mostly from lower middle and poor classes, spend most money on firecrackers are the worst affected by the poor air quality. Their children and old parents will suffer the most and they would spend the most on their healthcare.

The administration and law enforcement agencies bother little about their welfare. Like the colonial British government, they are happy seeing the society divided and killing each other. The educated and rich are getting disenchanted from festival celebrations, slowly dissipating the Indian culture and traditions. This is what the colonial rulers always strived for – destroy their culture and traditions, and the people will love to be slaves.

 FY24 Real GDP growth surpassed all estimates, even the most optimistic once, by a wide margin – growing 8.2% in FY24. The forecasts for FY25 have been upgraded sharply higher. Now most professional forecasters are projecting FY25e GDP growth to be in the 6.7-7.2% range.

FY24 Real GDP growth has been led by investments (+9%). Consumption growth, both public (+2.5%) and private (+4%), continues to remain poor. The share of private consumption fell to 55.8%, lowest in decades. Exports (+2.6%) growth was also one of the lowest in a decade (excluding Covid affected FY20 and FY21).

On the supply side, FY24 witnessed one of the worst agricultural GVA growth (+1.4%) in a decade; whereas Industrial growth (+9.5%) led by manufacturing and construction, was extremely strong. Services growth slowed down to 7.6% from 10% in FY23.

In 4QFY24, the surprise came largely from exports (+8.1%). Government consumption (+0.9%) completely collapsed due to election related restrictions.

On the supply side, agriculture GVA (+0.6%) and Services GVA (6.7%) growth was below par. Industry GVA growth (8.4%) did much better. However, adjusted for base effect (4QFY23 Agricultural GVA growth 7.6% and Industrial GVA Growth 3.4%) things look better.

FY24 Nominal GDP growth came at 9.6% (FY23 14.2%). Nominal GDP (GDP at Current Prices) is estimated at ₹295.36 trillion, against ₹269.50 trillion in FY23.

Fiscal Balance: Given the higher nominal GDP than previous estimates and better tax collections, FY24RE for Fiscal deficit has been revised downward to 5.6% from previous estimate of 5.8%. In addition, Rs2.1 trillion transfer from the RBI has also helped the fiscal balance materially. It is, therefore, likely that FY25BE for fiscal deficit would also be revised lower from 5.1% presented in the interim budget.

A favorable fiscal balance, favorable monsoon, and visibility of tax buoyancy shall afford greater fiscal leverage to govt for capex and social programs.

 The National Sample Survey Office (NSSO) released the results of the latest Household Consumption Expenditure Survey a few days ago. The report highlights some interesting trends in household consumption patterns over the last two decades. The changes in the rural consumption patterns are particularly noteworthy.

Some of the key highlights of the survey could be listed as follows:

Consumption levels

·         The average monthly per capita consumption expenditure (MPCE) in rural areas is Rs3773 while in urban areas it is about 71% higher at Rs6459.

·         Rural population spends 46% on food and 54% on non-food items. While in urban India this ratio is 39% and 61%.

Consumption disparities

·         There is a significant regional skew in both rural and urban expenditure levels. Sikkim has the largest MPCE (Rs7731 for rural and Rs12105 for urban consumers) while Chhattisgarh has the lowest MPCE (Rs2466 for rural and Rs4483 for urban consumers). Delhi, Goa, Kerala, Punjab, Tamil Nadu are some notable states with above average MPCE.  Assam, Bihar, Gujarat, Jharkhand, Odisha, Uttar Pradesh, West Bengal are some notable states with below average MPCE.

·         SC/ST have below average MPCE, while OBC’s consumption levels are close to national average.

·         Rural-Consumption gap has reduced over the past two decades, but it is still quite high. In FY05 Rural MPCE (Rs579) was 91% lower than the urban MPCE (Rs1105). In 2022-2023, the gap has reduced to 71% (Rs3773 vs Rs6459)

·         Overall, the top 5% of rural population (MPCE Rs10501) is consuming 7.6x more than the bottom 5% (MPCE Rs1373). The skew is much higher in urban India where the top 5% population (MPCE Rs20824) spends 10.4x more than the bottom 5% (MPCE Rs 2001). MPCE of the top 5% in urban areas (Rs20824) is almost 2x as compared to the MPCE of top 5% in rural area (MPCE Rs10501).

·         Not only between the top 5% and bottom 5%; the gap is significant between the top 5% and the next 5%. In urban area, this gap is 68% (Rs20824 vs Rs12399) while in rural areas this gap is 58% (Rs10501 vs Rs6638)

Consumption patterns

·         Beverages, Refreshments, and Processed Food is the largest item in urban and rural consumption baskets. Urban consumers spend 10.64% of MPCE on this while rural consumers spend 9.64% of MPCE on this. Dairy products are the second largest consumption item in both rural (8.33%) and urban (7.22%) baskets. Conveyance and medical expenses come at a close third and fourth.

·         Since FY05, rural India has seen a significant rise in expenditure on Fruits, beverages & processed foods, hospital expenses, conveyance, entertainment, and durable goods. The share of cereals, sugar & salts, fuel & light, clothing and footwear have seen a significant fall. Education and toiletries are two notable items that have not seen much change in share in MPCE.

·        In the case of the urban consumption basket, the trends are similar, except that spend on education has fallen and expenditure on rent has seen notable increase.

Last week, the National Statistical Office (NSO) released first advance estimates of the National Income for FY23. These estimates are important because the budget estimates for FY24 would be based on these estimates. The finance ministry will use these estimates to project the GDP, savings, tax revenue, expenditure and allocations for various sectors of the economy.

Some key highlights of the data released by NSO could be listed as follows:

FY23 real growth (2011-12 prices)

• GDP (at 2011-12 prices) may increase by 7% to against 8.7% in FY22. This estimate is marginally higher than the RBI’s latest estimate of 6.8%.
• Per capita GDP may increase by 5.8% to Rs1,13,967, in FY23, against a growth of 7.6% in FY22.
• Per capita private consumption may be Rs65,237, a growth of 6.6% over FY22.
• FY23 Nominal Growth (current prices)
• GDP may increase by 15.4% to US$3.3trn, against 19.5% growth in FY22.
• Per capita GDP may grow by 14.2% to Rs1,97,468 (US$2394), against a growth of 18.4% in FY22.
• Per capita private consumption may grow by 15.1% to Rs1,18,580 (US$1437) in FY23, against a growth of 16% in FY22

FY23 Sectoral growth (2011-12 prices)

• Agriculture growth may accelerate to 3.5% (FY22 – 3%)
• Manufacturing growth may collapse to 1.6% (FY22 – 9.9%)
• Mining growth to collapse to 2.4% (FY22 – 11.5%)
• Construction growth to slow down to 9.1% (FY22 – 11.5%)
• Public administration and Defence expenditure growth to slow down to 7.9% (FY22 – 12.6%)
• Electricity, gas, water and other utility services growth accelerate to 9% (FY22 – 7.5%)
• Trade, hotel, transport, communication etc. to grow faster at 13.7% (FY22 – 11.1%)
• Financial services, professional services and real estate to grow by 6.4% (FY 22 – 4.2%)

FY23 Production growth

·         Rice, cement, Oil & gas, steel, telephone subscriber, cargo at ports, air passengers, railways, exports, mining, manufactured products etc. may witness material slow down in growth.

·         Commercial vehicles, passenger vehicles, bank credit may witness higher yoy growth as compared to FY22.

Key observations

• The estimates are based on the data available till November 2022 and may go under significant revision when the first revised estimate for the full year will be released in May 2023. These estimates seem to assume sharp recovery in manufacturing and some slowdown in services in 2HFY23. However, it appears unlikely that the industrial growth will accelerate enough in 2HFY23 to achieve 4.5% real GDP growth in 2HFY23. The lagged impact of higher rates, tighter liquidity and slower global demand (exports) may actually be more pronounced in 2HFY23.
• These estimates may however allow the government to project buoyant tax revenue in FY24, and accordingly provide for higher government spending and improved fiscal position in the union budget to be presented on 1^st February.
• The NSO has projected a trade deficit of 4.6% of GDP for full year FY23 up from 2.5% in FY22. This is worrisome, as the exports are likely to slow down further in 2023 as the world struggles to avoid recession.
• Real per capita private consumption expenditure of Rs65,237 read with huge income inequality indicators, is inadequate to support self-reliance of citizens and higher growth. The pressure on the government to provide basic necessities like food, housing, education, healthcare etc. will only increase going forward. This will (i) constrict investment; (ii) hinder development of quality human resources; and (iii) lead to even more socio-economic inequalities.
• The good part is that buoyant growth may save the finance minister from making the unpleasant decision of hiking taxes.