ANNUAL NEWSLETTER AND MARKET VIEW FOR 2016

2015 was both an interesting as well as tough year in the markets. For those who were bottom pickers and in the right segments the year panned out well. Those who were index huggers were on the other hand largely frustrated by the markets. Before I talk about the markets and developments in the domestic and global economy I will talk about the better part of the story for 2015 where all our Long Term Investment Calls as well as the MODEL PORTFOLIO have done phenomenally well in a tough year.

LONG TERM INVESTMENT CALLS

We gave a total of 13 investment calls this year as against 11 in 2014. This was much higher than our promised number of 5-10 calls. Almost all the calls delivered strong returns for investors.

Out of our Long Term Investment calls of the year 2014 we exited IRB Infrastructure with a gain of 174%, KRBL with a gain of 580%, Shakti Pumps with a gain of 143% and Arrow Coated Products with a gain of 390% this year. With this we have exited 6 of the 11 investment calls given in 2014.

Our Long Term Investment Calls for the year 2015 have done very well in a tough year. Out key performers for this year were stocks like Trident Ltd, KEC International & Praj Industries which gave returns between 70-90% for this year. Besides this Genus Power Infrastructure, Sterlite Technologies, Texmaco Rail and Career Point also delivered returns between 40-50% . We still continue to see value in most of the recommendations for this year and have not closed any call yet. We see good opportunities emerge in the year 2016 as the economy finally comes out of a slower growth orbit which will create profit opportunities for a large number of Mid Sized Companies.

2014  INVESTMENT CALLS                             December 2013-November 2014

			LONG TERM INVESTMENT CALLS
		PURCHASE				SALE
	Name of Company	Date of Call	Price	CMP	% Returns	Date of Call	Price	% Returns
1	KRBL Limited	01-01-2014	35			26-11-2015	238	580%
2	IRB Infrastructure Limited	01-01-2014	95			05-01-2015	260	174%
3	VA TECH WABAG	03-02-2014	265	685	158%
4	Voltas Limited	18-03-2014	145	320	121%
5	Shakti Pumps Limited	17-04-2014	70			01-04-2015	170	143%
6	Balrampur Chini Limited	31-03-2014	55			03-05-2015	50	-9%
7	Sintex Industries	25-05-2014	75	102	36%
8	IFB Agro	20-07-2014	200			26-10-2014	390	95%
9	Surya Roshni Limited	10-06-2014	80	145	81%
10	Arrow Coated Products	20-10-2014	200			20-11-2015	773	390%
11	Action Construction	29-10-2014	32	47	47%

 

2015 INVESTMENT CALLS                              December 2014-November 2015

			LONG TERM INVESTMENT CALLS
		PURCHASE				SALE
		Date of Call
	Name of Company	01-12-2014	Price	CMP	% Returns	Date of Call	Price	% Returns
1	Texmaco Rail	01-12-2014	105	151	44%
2	Career Point	15-01-2015	105	142	35%
3	IDFC	23-01-2015	160	160	0%	Demerger	Exit
4	Praj Industries	19-02-2015	56	92	64%
5	Crompton Greaves	23-02-2015	176	195	11%	EXIT
6	Jain Irrigation	07-04-2015	70	69	-1%
7	KEC International	17-05-2015	84	157	87%
8	Inox Wind	18-06-2015	467	365	-22%
9	Mahindra Lifespace Developers	21-07-2015	403	482	20%
10	Genus Power Infra	29-07-2015	27	51	89%
11	Trident Ltd	25-08-2015	33	59	79%
12	Sterlite Technologies	28-09-2015	67	97	45%
13	OM Metals Infrastructure		49	54	10%

 

MODEL PORTFOLIO PERFORMANCE

The year 2014 was phenomenal for our MODEL PORTFOLIO where the portfolio delivered a return of 86% versus 31% for the Nifty. Last year was relatively an easier year for stock picking as market participants were wary and there was huge value in contrarian investing. The year 2015 was one where we had to avoid speculative stocks while buying into stocks that we believe will deliver steady returns over the long run and we were able to do so.

The MODEL PORTFOLIO delivered a return of 20% this year while the markets fell by 4%. A 20% outperformance is huge for a year like 2015 where investing was tough. As the markets shot up during the first few months of the year I remained wary of the move as it was not backed by fundamentals and we kept substantial cash in the portfolio. We deployed the cash at the end of the second quarter when I thought that the worst is over. However markets continued to languish around a few hundred points of the year lows till the end of the year. However superior stock selection helped us sustain our outperformance.

We hope to keep up sustained outperformance via long term investing and stable portfolios going forward. As the economy recovers it will provide us with enough opportunities to identify and invest in Alpha generating investments. The good part of the portfolio has also been the extremely low churn of the portfolio which enhances post tax returns. We will continue to have a portfolio of 15-25 stocks depending on our view of the markets as well as external conditions.

For the second year in a running our MODEL PORTFOLIO returns are higher than ALL peer group Mutual Fund Schemes. Given the fixed cost nature of our advisory this is extremely effective for investors with a moderate size portfolio as it avoids paying fees related to Assets Under Management.

MODEL PORTFOLIO PERFORMANCE

2014 PERFORMANCE

	PORTFOLIO	NIFTY
Q1 2014	17.3%	6.3%
Q2 2014	38%	13.5%
Q3 2014	6.5%	4.6%
Q4 2014	6%	4%
OVERALL 2014	86%	31%

 

2015 PERFORMANCE

	PORTFOLIO	NIFTY
Q1 2015	2.1%	2.5%
Q2 2015	9.87%	-1.43%
Q3 2015	3.32%	-5.02%
Q4 2015	3.25%	-0.05%
OVERALL 2015	19.65%	-4.05%

 

THE YEAR THAT WAS

At the start of the year 2015 it was very clear to me that the expectations were running ahead of the ability of the economy to perform and did not take into account the real on ground situation. Global risks were also underestimated as they are overestimated today. At the beginning of the year my expectation was that the markets would at best deliver single digit returns. As it turns out we are likely to end the year with single digit negative returns. The consensus targets for the Nifty and Sensex in general were 10000+ and 35000 at the beginning of the year.

Although the economy has started to turn around with tentative uptick in both investment and consumption demand the biggest story of this year has been of funds flow. We have had record outflows from Emerging Market Funds, both driven by the poor performance of some of the key Emerging Economies like Brazil, Russia, Turkey, South Africa etc as well as the slowdown in China and the fears as a result of a weakening Chinese currency. On top of that we have had the huge fall in oil prices which has led to redemptions out of various kinds of funds by the Sovereign Wealth Funds of Oil Rich countries. As a result Emerging Market Funds lost over $ 60 billion this year, a record of sorts. On the other hand the big funds flow picture was also that of huge flow of funds into Equity Mutual Funds by domestic investors where the net flows for the full year 2015 are likely to be nearly $ 12 billion or Rs 80000 Crores and likely to continue going forward too.

Most of the other fears remained fears and impacted sentiments more than anything else. Low Oil prices have provided a huge stimulus to the Indian Economy which got somewhat counterbalanced by one of the worst monsoons in decades as well as a slowdown in the global economy and its impact on exports. Greece, Eurozone, China, Middle East fears, China etc impacted the markets in various ways through the year and impacted full year returns. In Europe, Mr. Draghi (Will do what it takes) started Quantitative Easing following the examples of the US FED & Bank of Japan which eased deflation fears and drove yields down thus pushing Eurozone away from depths of despair. China continued to confound lot of analysts by “Soft Landing” as compared to the “Hard Landing” expected by many. The Chinese economy continues to restructure from Investment Led to Consumption Led. However the fact of the matter is that given the amount of Debt in that economy it will continue to slow for a long time going forward.

The commodity crash has been a boon as well as bane to a limited extent for India. As an importer we do gain from the crash. However it has impacted many companies in the Steel, Aluminium, and Oil etc adversely. This in turn has raised the NPA’s of banks as Metal Companies have been big borrowers. However on balance it benefits the Indian Economy greatly.

On the domestic front the Government has pushed forward on reviving the economy. However some key reform legislations remain stuck in the Parliament Logjam. However bills like GST are more enablers to the India story rather than something that make the India story.

THE YEAR LOOKING FORWARD

As we look forward into the year 2016 a few things are very clear.

1. Most analysts and forecasters who predicted huge returns in 2015 are now extremely risk averse and are looking at moderate to flat market returns over the next 12 months
2. The “Modi” Euphoria has given way to “Despair” or to put it better extremely low expectations
3. Most moves of the government towards Fiscal Consolidation, Economic Revival as well as an easier monetary policy are being ignored by the markets.
4. Growth revival is being questioned and earnings growth expectations have come down sharply
5. There is a general belief that FED tightening will lead to large fund outflows from Emerging Markets and as a result impact EM returns.

The actual performance of the economy and markets are likely to be very different from consensus today. My key calls for 2016 are as below

1. Government’s moves towards boosting the economy are likely to make an impact in the year 2016. Both investment and consumption demand are likely to see a revival
2. Two seasons of extremely poor monsoons, especially 2015 are likely to be followed by a normal monsoon as per history of the last 150 years. Preliminary predictions of IMD also indicate the same. This will be positive for growth
3. Implementation of Pay Commission recommendation along with lower interest rates will boost demand across the board.
4. A shallow FED rate hike cycle is likely to be bullish for Equities globally. The restrictive rate level will be as and when the FED Funds rate crosses 3% which is at least three years away. Global Central Bank balance sheets are still expanding due to continued money printing by Bank of Japan and ECB.
5. Earnings growth revival will be strong in 2016-17 as input costs remain subdued, demand recovers and the commodity cycle bottoms and shows some spike.
6. Emerging Markets Equity flows as well as domestic flows are likely to be significantly positive this year
7. Bad Debts of Banks have likely to have peaked. Next year will show lower write-offs and maybe some recoveries this will boost their profit growth
8. We are likely to see a 15-20% earnings growth in India over the next 3 years.

Contrary to consensus I believe that there are several drivers for the Indian Economy as well as the Stock Markets. Indian Macroeconomic outlook is strong and will only gain steam as we move forward.

IN CONCLUSION

In conclusion I believe that that fear factor has played out in the markets. Both the economy and markets have bottomed out and are looking at a significant upside. I expect markets to rally 20%+ from the current levels till the end of 2016. This will be driven by strong government finances, economic recovery as well as earnings recovery. The Indian story will be driven by strong consumer demand, revival of investment demand, Governments focus on productive asset building as well as some recovery in external demand.

Sectoral opportunities are likely to be across the board in both consumption as well as investment sectors. Select PSU Banks, Restructured construction companies, Road and Railway companies, Power Reform beneficiaries besides a whole host of Mid Cap companies that benefit due to lower input and interest costs are available cheap today. Entertainment oriented companies are also likely to see good traction and provide opportunities.

Domestic funds flow into Equities continues to be strong and will remain strong for the foreseeable future. Global funds flow should reverse in 2016 despite the pressures of outflows from Oil country Sovereign Wealth Funds. Indian bonds are also set to rally significantly with a target of 6.8-7% by the end of 2016.

When everyone is talking of risks, it’s time to make returns.

 

Happy Investing, 

Sandip Sabharwal

1^st January 2016