The year 2017 was a good year for Indian Investors after subdued returns of the last two years. The broad market indices rallied by around 28% with significant Alpha generation from selective stock picking which we also successfully did. The year started off with a great amount of scepticism (always good for the markets) due to Demonetization and fears around Trump policies. However the year actually was market by stabilizing and improving global growth, subdued inflation globally and a move towards policy normalizations.
There were various fears which cropped up during the year including North Korea fears, China fears (always ongoing), some elections in Europe etc etc. Markets globally continued their moves ahead as the crisis fears actually declined. For those of you who think that Indian Markets did very well be ready to be surprise. We actually underperformed Emerging Markets big time where the Morgan Stanley EM Index actually rallied 34%.
As a contrarian investor I normally look at what people are thinking, combine that with the ground situation and then try to formulate my view on the future. My view at this point of time is that 2018 will be very similar to 2017 in terms of stock market performance. Overall returns should be in the region of 15-25% this year. An improving economy will create a situation where we will be able to find more Alpha generating ideas which will outperform markets. The key is to identify undervalued stocks which are underowned but will have positive triggers going forward.
Sceptics argue that the strong flows into Mutual Funds will slow down. This is a totally erroneous assumption. The fact is that the cycle of MF Flows into equities and away from hard assets has just started this year. It will last for a few years till the end of the current expansion cycle. I will not be surprised if flows actually improve in 2018 rather than coming down.
The other and most nonsensical argument that I hear all the time is that “Its just a liquidity driven rally”. This is the most banal statement. The fact is that all rallies are liquidity driven and all market falls are due to a squeeze in liquidity. The key is to analyse what leads to a move out of equities. It normally happens once the market collapses after huge euphoria, build up of excesses and an inflationary spiral. None of them are visible at this stage.
Then skeptics argue that P/E ratio is very high and there is no earnings recovery. While there is some truth in this the reality is that we see high PE’s from debt free companies that have sustainable business advantages. However in sectors and stocks where there is scepticism there are huge opportunities. As GDP expands more rapidly the scope of generating higher market capitalization spreads across a wider range of companies and that is what active investors seek to capture.
Then skeptics say “US FED FEARS”. Till they continue to fear we should not be fearful. Global money flows into risky assets will continue till the US FED Funds rate becomes restrictive for growth ( i.e. interest rates become so high that growth suffers). That is still a long way off as Real Rates ( Policy Rate minus inflation) is still negative in most major economies like US, Europe and Japan. Restrictive rates are far-far away.
As we enter 2018 and I read most brokerage notes on expectations for 2018 I see that the average return expectation for 2018 are around 5%. This is good. Skepticism and fear are the best things on which bull markets feed. We will see this feed up continue.
From the Indian perspective we have all ingredients for a domestic economic revival now. GST regime is stabilizing and has actually been disinflationary rather than inflationary. Benefits going forward will further increase as productivity gains start playing out. The rural economy is showing signs of coming back as farm incomes improve and the government focuses on that segment.
Infrastructure investments are picking up steam and will move strongly going forward. The missing ingredient of corporate capex revival will also start playing out as the economy picks up and capacity utilizations improve. As such, unless and until we have a big inflation spiral we will see a continuously improving economic growth over the next three years. As company sales increase we will see a greater improvement in profits as operating leverage plays out (fixed costs distributed over larger amount of sales).
Our advisory plans under WWW.ASKSANDIPSABHARWAL.COM have done exceptionally this year with the MODEL PORTFOLIO appreciating by 62.15%, exceptional returns from our LONG TERM INVESTMENT CALLS and spectacular profits from our short term investment as well as trading products where full year returns have been very high and just the 4th Quarter of 2017 saw profit booking of Rs 300000 in POWER ALPHA STOCKS (Short term cash calls) and Rs 260000 in our trading product ONLY FOR TRADERS.
Themes to focus on this year will be infrastructure, capital goods as well as companies that benefit from rural revival. Market corrections will keep on giving opportunities in different segments as optimism and pessimism fluctuate. This year might not have as less of volatility as 2017. We will see at least one 10% plus kind of correction as Euphoria builds up to unsustainable levels. Pessimists and Skeptics will be out with daggers at that time, however it will be a time to Buy not Sell. I am optimistic for 2018, we might not be able to outperform so much but the potential to outperform will be there for sure.