Do it yourself

 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.

I have been doing market surveys during Diwali days for the past many years. Visits to various retail & wholesale markets in Delhi NCR and other nearby towns would usually provide useful insights into the latest economic conditions, consumer behaviour and consumption patterns. I could factor in these insights in my investment strategies to rebalance my portfolio in congruence with the latest socio-economic conditions.

I cannot claim that my assessment of latest market conditions, as deduced from my observations and interactions with the market participants, have always been correct; though I would say that these insights provided clarity to my thoughts and enhanced my confidence in my portfolio.

As usual, I have visited more than 50 retail (including shopping malls) and wholesale markets in NCR, Agra, and Jaipur in the past three weeks. What I observed this year is unprecedented. I have never been so confused in my reading of consumer behaviour.

The footfalls in the market were perhaps even larger than Pre Covid (2019) festival season. Almost all markets were overcrowded; most shops had good inventory; “Made in China” proportion was less as compared to 2019, but not insignificant by any measure; there were plenty of ‘new’ products in almost all categories – from luxury cars to small Diwali decorations; annual inflation appeared more in the range of 15-20% as almost everything was significantly more expensive as compared to the previous year; gifting trended more towards consumable (sweets, chocolates, snacks, juices etc.) than durables (crockery, silver coins, appliances etc.); down-trading was visible in food, sweets, textile, appliances, decorative items, whereas shoppers preferred expensive models in vehicles, phones, laptops & tablets, furniture & furnishing, footwear, eyeglasses, etc.; and home renovation and upgrade demand appeared to have plateaued a bit after two good Covid (WFH) years.

However, despite the larger footfalls in the markets not many shopkeepers and wholesalers appeared excited about Diwali sales. Almost everyone complained about poor margins, high inventory losses, higher costs especially rentals and interest, tighter liquidity and credit norms, surreptitious restrictions on Chinese consumable imports; preference of manufacturers towards organized retailers, etc. A decent proportion of whole sellers termed the current consumer enthusiasm unsustainable.

The following are some of the key takeaways from my market visits during the month of October:

·         Most wholesalers indicated lower rural consumer demand as compared to the urban consumer demand. Despite a bountiful monsoon, the rural income is expected to be lower.

·         Urban households have significantly increased buying of DIY kits, and appliances like bread & pizza maker, baking ovens, larger and better mobile phones and laptops, cameras etc. This could actually be an indicator of a much larger trend evolving in India that may include more households looking to save costs on food, bakery, repairs etc. and creating additional sources of income from baking, food delivery, social media posting, etc. Work from home may be gradually assuming an altogether different dimension in India.

·         Aluminium and Steel doors and windows started to gain popularity in rural markets a few years ago. These doors and windows are relatively cheaper, convenient to buy & install, more safe & durable and require no maintenance. The trend is now catching up in urban clusters also. The trend is similar to when ceramic and vitrified tiles began to replace marble in residential construction. The manufacturers of steel and aluminium door and window panels are innovating and bringing the final looks closer to the traditional wood.

·         The divergence in the urban consumer behaviour is more conspicuous than ever. They are definitely down trading on essentials and staples like food, healthcare, toiletries, etc.; but up trading on vanities like higher end vehicles (4W and 2W), mobile phones, footwear, and personal accessories like eyeglasses.

·         Most shoppers indicated lower gifting this year. The money saved from pretentious gifting is likely to be spent mostly on vacationing and personal vanity.

·         Chocolate had started gaining prominence in the middle class palate about two decades ago. It is now transcending to lower middle class households also; which are already larger consumers of noodles and pasta. A home baker from Ghaziabad, who operates mainly in an urban slum and shops for ingredients from Delhi’s Sadar Bazaar, indicated a 7x rise in orders for cakes from the local dwellers in the past two years.

·         Online vs offline debate seems to be settling gradually. Almost everyone indicated a path of mutual cooperation where both mediums would leverage each other’s strength.

·         In the NCR at least, the store composition has changed in favour of luxury. The space vacated by the mid and economy segment stores and restaurants during Covid are getting occupied by high mid and premium category stores, cafes and restaurants.

·         Premium Lingerie stores at prime locations in most malls could also be indicative of some important social trends.

·         Japanese and Korean stores and restaurants are becoming commonplace in most malls.

·         The next generation of most wholesalers and distributors is least likely to carry the family business the way it has been running for generations. A significant proportion of whole sellers reported disinterest of the next generation in the family business. In many cases even parents do not want their children to continue the family business. The reasons cited were primarily – very poor returns as compared to the capital invested; extremely poor working conditions; rising competition from larger organized players; opportunities in global trading; etc.

·         Textile fashion industry is growing deeper and wider. Many young designers are using technology and digital medium to create and establish their own labels and commanding premium prices. As per a famous fashion label owner one new label is being launched almost every week.

To sum up, I find it difficult to make a general assessment this year. But some of the micro trends are definitely useful. I am though inclined to lower my pessimism on consumer durables (auto and household appliances) and find opportunities in these sectors.

I will be happy to hear the experiences of readers from their own shopping trips; especially if their experiences sharply diverge from mine. 

 The new year of the Goddess of Wealth (Mahalakshami) has started on a rather somber note for the Indian equities. After a very strong year since Diwali of 2020, the markets appear tired and uncertain.

The tailwinds of easy money and lower borrowing cost, which were among the factors that supported strong market performance since Diwali of 2020, appear weakening; whereas the headwinds of inflation, tighter money, and slowing growth appear gaining strength.

The valuation comfort that aided investors’ sentiments last year, is no longer available. The opportunity provided by the panic reaction to the Covid-19 pandemic has been mostly exploited by investors. Most of the low hanging fruits have already been plucked. The risk reward ratio is no longer favorable at the broader levels at least.

The Covid-19 pandemic itself, and the response to the pandemic created numerous opportunities in past one and a half year. The market readily identified these opportunities, and investors positioned themselves well in time to benefit from these opportunities in next few years. There is therefore little element of positive growth surprise in most of these opportunities; to the contrary the chances of negative surprises do exist. Some of the trends where investors are well entrenched could be listed as follows:

·         Acceleration in the process of consolidation of businesses, at the expense of smaller and unorganized enterprises that started a few years ago.

·         Enhanced role of technology in business and household management. The trend is most visible in digitalization of financial services, retail selling of products and services, entertainment & socializing, and education & skill enhancement, etc.

·         Rise in public expenditure to support employment and capacity building.

·         Enhanced policy support for private enterprise for capacity building to achieve the goals of sustainability, self-reliance, employment, higher growth etc.

·         Commodity inflation due to global imbalances in demand-supply equilibrium for many commodities. The inflation could have been resulted due to logistic constraints, underinvestment in capacity enhancement in past one decade, sudden and sharp rise in localized demand due to opening of economies post pandemic caused lockdowns; and speculative positioning aided by cheap and abundant money.

There is little margin for error in the market, as evident from the recent episodes of violent market reactions to marginally below expectation results and adverse policy decisions. Significantly increased jitteriness before most routine market and policy events like scheduled policy meets, declaration of quarterly results and monthly sales numbers etc., is also indicative of the dithering investors’ confidence in the markets.

Multiple downgrades of emerging market equities in general and Indian equities in particular; acceleration in the selling by foreign investors and sharp correction in some bloated pockets of the markets in past three weeks has further added to the nervousness of the investors.

Outlook for the new Diwali year

The market outlook for next 12 months is uncertain. For the next few months, the markets will be guided by the direction of global monetary policy and consequent direction of flows. The expected slowdown in growth due to elevated commodity inflation and exhaustion of policy stimulus may also adversely impact investors’ sentiments. However, there is nothing to indicate a substantial decline in the market or a protracted phase of uncertainty. The sentiments shall improve as the time progresses and investors adjust their return expectations and asset allocations.

It is important to note that the government has very well protected the fiscal position and managed to overcome the external vulnerabilities while managing the pandemic. The twin deficits, which have traditionally bothered the Indian equity markets during the periods of slower growth and global monetary tightening, may not be matter of material concern this time around. Indian equities may therefore not witness any material sell off as the global monetary tightening cycle kicks off.

Having fully recovered from the economic contraction caused by the pandemic, the Indian economy is now faced with the challenges to find new propellers for the economic growth. The policy initiatives to accelerate growth appear promising. Substantial public outlay for infrastructure capacity building and incentives for private investment in new capacities augurs well for a strong new growth cycle which may have already taken root and show accelerated growth in FY23.

Accordingly, my outlook for the Indian equities for next 12 months is as follows.

·         For next few months, the markets may remain volatile and weak. This volatility and weakness may provide good opportunities for restructuring the portfolios and positioning for new growth drivers. Overall, benchmark indices may yield single digit returns for the new Diwali year.

·         Investors might consider moderating their return expectations and altering their asset allocation accordingly. The equity returns of past 18months were exceptions and should be seen as such only. Benchmarking portfolios to these returns and taking avoidable risk is totally unadvisable.

·         Any precipitous rise in bond yields in next few months may be a decent opportunity to increase the debt allocation.

·         While technology remains a key driver of growth, buying anything at any price might not be the best strategy for investors.

·         Real estate appears to be one of the preferred spaces for now. However, sharp rise in domestic rates could suddenly change the sentiment for real estate. The investors need to therefore tread very cautiously in this sector. For smaller investors taking leveraged bets in illiquid asset is not advisable. It is important to note that unlike the previous real estate cycle, this time the investors have an opportunity to invest in good quality real estate through liquid, affordable and dematerialized instruments, viz., REITS.

Trivia

India is a fascinating amalgam of diverse cultures and traditions. Most ethnic communities here follow a lunar calendar. However, there are many which follow a lunar/solar calendar, Some communities also follow a solar year. Accordingly, there are numerous “New Year” days in our country.

The Government of India follows two calendars - Lunar calendar based on Saka Samvat and Solar based Georgian calendar. The new financial year and academic years (mostly) follow  April-March cycle based on Georgian calendar. Most Hindu communities follow a Lunar based calendar based on Vikarm Samvat. The New Year for these communities starts with the first day new moon in Chaitra Month (March/April). Only in Gujarat and Rajasthan, Balipratipada (first day of new moon in Kartik month) is celebrated as New Year.

The fact that the stock markets in India celebrate Balipratipada as New Year, signifies the important role Gujarati and Rajasthani communities have played in the development of financial markets in the country. To some it may also imply the overwhelming influence of these communities on the financial system of the country.

Nonetheless, it is important to note that Vikarm Samvat 2078 actually started om 13 April 2021 for most of India. For the Government of India, the new year (Saka Samvat 1943) started on 22 March 2021.

(One version of this article was published at moneycontrol.com on 4 November 2021)

It is a tradition amongst local brokerage houses, which primarily cater to the domestic household clients, to present a list of their top stock ideas to their clients on every Diwali. The ideas are presented usually with one year investment period, i.e. till next Diwali.

Reading through the presentations of various brokerages this year, I found the following key messages:

Kotak Securities

As we advance towards getting the vaccine (by middle of next year) and economy gets back to normalcy, we can expect the economy driven sectors to outperform the defensives in Samvat 2077. Banks, NBFCs, automobiles, oil & gas, telecom, utilities, capital goods, cement and metals could come into focus in Samvat 2077. The potential upside in most of these sectors based on our one year price targets ranges between 20 & 39% (Vs single digit potential upside in Nifty50). Since most of the economy driven sectors are prone to market correction one should have an accumulation strategy in them rather than investing at one go.

ICICI Direct

Given the scenario, we see value emerging across the market cap spectrum with the key filter being quality. We continue to advise investors to utilise equities as a key asset class for long term wealth generation by investing into quality companies with strong earnings growth and visibility, stable cash flows, RoE and RoCE.

Motilal Oswal Securities (Retail)

As we enter Samvat 2077, the markets have seen a complete recovery from the Covid lows. We expect Nifty EPS growth of 4% in FY21 while expecting a sharp rebound in FY22. Thus, the overall structure of the market remains positive. At 18x FY22 earnings, Nifty valuations is also not very expensive as it is trading closer to its long-period averages. With the economic activity recovering fast, more earnings upgrade cannot be ruled out. Further strong global markets can keep the liquidity abundant in the system, thus providing support to the overall market. However, intermittent corrections cannot be ruled out as there is a risk of second wave of Covid-19 and thus sustenance of economic recovery holds the key. From next 12 months perspective, we are positive on IT, Healthcare, Rural-Agri, Telecom, Consumer along with select Financials. We believe another round of fiscal stimulus could help elevate sentiment further.

HDFC Securities

India still is not out of woods as far as the Covid pandemic is concerned or its impact on macro or micro is concerned – though latest macro and micro data are encouraging.

In the new Samvat, investors need to look at asset class diversification, sector diversification, spreading investments over time (by way of SIP or staggered investments). Also going by the way Global investing has picked pace, MNIs and HNIs need to look at this asset class to check whether this suits their risk profile and skillsets.

All in all after a turbulent past year, we can look forward to a relatively sedate but selectively rewarding year.

Sharekhan (BNP PARIBAS)

Stepping into Samvat 2077, the threat of the pandemic is not over yet and the fear of a second wave in big geographies is a potential risk. Further, the overhang of US election outcome will keep equity market on its toes.

For Samvat 2077, we have hand-picked 12 quality stocks to create a portfolio, which is a mix of both large-caps and quality mid-caps. All the 12 companies in the portfolio have all the ingredients to outperform the broader market indices over the next 12 months and at the same time withstand volatility and emerge stronger.

SMC Global

It is an opportune time for the investors to tweak and tighten portfolio for the next Bull Run, by embracing buy on dips strategy in frontline quality stocks. Quality stocks with structural story will be the right recipe for a good investment and wealth creation.

Reliance Securities

In Samvat 2077 we recommend the investors to focus on sectors, which are considered to be defensive or prone to prolonged economy slowdown. Further, the companies having sound execution expertise, brand equity, quality management, lean balance sheet with consistent cash flow generation, sound corporate governance, healthy return ratio and better margin of safety are likely to deliver better alpha for the investors.

Axis Securities

Our themes for Samvat 2077 are:

·         The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline.

·         Housing and banking will be major themes to watch out for in 2021 because of correction in real estate prices and lower interest rate regime.

·         Digital and telecommunications will continue to remain major long term structural themes.

·         Growth is now a more certain theme, but growth at a reasonable price will be an even bigger theme to invest which will deliver solid returns over the next one year.

Yes Securities

The year 2020 is largely about survival, both health‐wise and finance‐wise. It is also an opportune time to tweak and tighten your portfolio for the next bull run. Vikram Samvat 2077 could well be akin to the year 2003, from a market standpoint.

As is evident from the above cited views of various brokerages, the consensus view is generally buoyant, with a few words of caution here and there. There appears to be a consensus that growth will pick up in 2021.

However, there are strong differences about the ideas that may work in next 12 months. Brokerages like Kotak are advising investors to accumulate cyclical; HDFC, ICICI and Reliance etc are suggesting investors to focus on high quality defensives; while Motilal is advising a diversified portfolio of sectors that worked in 2020, e.g., IT, healthcare, rural/agri an select financials etc.

Some like Axis Securities are forecasting strong midcap outperformance; and some like ICICI Direct are advising focusing on quality large caps; most other have suggested a multicap strategy with a judicious mix of large and small cap.

One striking feature is the disconnect between the broader view and the suggested stock ideas. For example, Axis Securities is bullish on Housing, but the list of recommended stocks does not include any real estate company.

Bharti Airtel, HCL tech, L&T, ICICI Bank, are some of the most common ideas in the list of stocks presented by most brokerages.

 For past many years, it has become a tradition for popular market participants (brokers, fund managers, large investors, analysts etc.) to don finest attires and appear on special Diwali shows hosted by various TV channels to announce their prophecies for the traditional Indian New Year. In the spirit of the festivals of light, they enthusiastically speak about their outlook about the economy, financial markets, and investment opportunities.

In earlier years, these prophecies were taken seriously by the audience, mostly household investors. However, based on my interaction with several people from the targeted audience, I feel, now days most people listen to the experts for validating their own positioning rather than for guidance. Whether in consonance of their positioning or otherwise, these prophecies are drowned in the noise of firecrackers on Diwali night itself.

However given the mobility restrictions and popularization of digital media due to Covid-19 this year, most experts have presented their views from their homes (instead of TV studios) rather early. Therefore the audience has got 4-5 days, against the usual 2 days, to digest the expert views and react to these, even though there is no change in these views for past 15years.

Besides, the experts draped in fine silk Kurtas spreading the message of positivity and hope, another thing that has dominated the financial media in past one week is the state of automobile sector in the country.

First, the CEO & MD of Bajaj Auto Limited, rattled the markets with his rather despondent commentary about the state of economy in general and the state of automobile industry in particular. He categorically stated that the retail sales this Navratri have been disappointing this year, and even the present level of sub optimal demand is not sustainable after the accumulated demand post “unlocking” is met.

The rival Hero Honda management however calmed the ruffled feathers, presenting a buoyant picture saying that demand has remained robust during the festival season and is likely to sustain in coming months.

The management of the commercial vehicle major Ashok Leyland appeared confident that demand shall pick up steadily from hereon. Both the tractor majors, M&M and Escorts, also continue to show robust growth and margins.

One of the large non banking lenders, Mahindra & Mahindra Financial Services, recently said that the market for cars is limited by supply and not demand. They told analysts that against 39000 cars in September, they financed 50000 cars in October.

The Federation of Automobile Dealers’ Associations (FADA), in a press release issued on Monday, advised caution for OEMs and dealers. The apex body of auto dealers categorically stated that “Dealer Inventory for both 2W and PV are at its newest highs in this Financial Year. FADA requests all OEMs with a special request to 2W OEMs to assess the on-ground inventory level and curb production accordingly.” The near term outlook of FADA, as stated in the said press release, is extremely cautious. It reads as follows:

“As we enter the last leg of festivals and with Covid getting into its 3rd wave in many cities, there is a sense of cautiousness amongst customers. Due to the lockdown announced in few European Countries, procurement of spares will also be a cause of hinderance for smooth supply of vehicles in Indian markets. This will create a supply and demand mismatch thus affecting the passenger vehicle sales.

FADA once again cautions both OEMs and Dealers to keep a check on vehicle inventory as post festivals, demand may remain subdued. Since Inventory levels are at its highest during this Financial Year, it may impact Dealers financial health thus leading closures and job losses.”

In my view, the divergence of views in Auto sector, aptly reflects the state of overall economy as well. At this point in time it is extremely difficult to make a correct assessment of the state of Indian economy.

The general view that rural economy is resilient to the slow down while the urban economy continue to struggle may not be relevant for one year perspective. The fiscal challenges of the government ought to eventually reflect on the support extended to the rural sector also. But as I said, it is very complex at this point in time. Making a prophecy about the economy and market for next 12 months requires a certain degree of both audacity and apathy. Unfortunately, I have none.