Nifty drops below 11000 again. Should I exit now?

The benchmark Nifty ended the week at 10,829 bouncing back from a 6 month low of 10,637 in the final trading session of the week. The sudden uptrend in the Nifty started after about 1 pm on Friday afternoon, which probably means that the market had got wind of the impending policy announcements by the Finance Minister later in the day. And right on cue, these announcements came after the close of the markets. The Finance Minister Ms Nirmala Sitharaman sought to assuage investor sentiment by rolling back the surcharge on Foreign Portfolio Investors on the one hand while increasing liquidity with a capital infusion of Rs 70,000cr into the banking system on the other. Other announcements included cheaper home and vehicle loans, better transmission of RBI policy rates and quicker GST credit for MSMEs etc. These announcements were timed to address the wide discontent with the performance of the overall Indian economy and the stock markets are expected to cheer these decisions when they reopen on Monday.

So the Government is clearly worried about the economy and is taking short term measures to stem the tide. But experts believe this is not enough – much more needs to be done at a structural level to stem the tide. Notable among these include increasing income for farmers in the agricultural sector, job creation in the manufacturing sector and NPA resolution in the services sector. Truth be told - the NDA Government has addressed these issues in its first term – it just needs to continue addressing them more into its second term. Ultimately the annual GDP growth rate which has slowed to a 5 year low of 5.8% for the last quarter of 2018-19 needs to be reversed back to 8.5% plus and more in order to achieve the Government’s own target of a $5trillion economy by 2024. Is this target realistic? Let’s look at the forecast of the International Monetary Fund (IMF) for the top 10 economies of the world.

Country	2018 actual GDP ($tn)	2018 actual rank	2024 projected GDP ($tn)	2024 proj. rank	GDP proj. growth rate
United States	20,494,050	1	25,728,734	1	3.30%
China	13,407,398	2	21,309,503	2	6.84%
Japan	4,971,929	3	6,848,808	3	4.68%
Germany	4,000,386	4	4,912,299	4	2.98%
United Kingdom	2,828,644	5	3,399,017	6	2.66%
France	2,775,252	6	3,354,126	7	2.74%
India	2,716,746	7	4,729,319	5	8.24%
Italy	2,072,201	8	2,323,028	9	1.65%
Brazil	1,868,184	9	2,468,216	8	4.06%
Canada	1,711,387	10	2,242,038	10	3.93%

Despite the recent slowing down of the global economy, the IMF forecasts that the top 10 economies will continue to grow for the next 5 years with India growing the fastest among the bunch. This will result in India climbing up two steps in the ladder while Brazil will climb up one. The IMFs forecast of $4.7tn for India is close to the Indian Government’s own $5tn target, implying that it is indeed realistic but a stretch target. In order to get there at least one of the three growth drivers – consumption, investments and exports – will have to lead the charge. If two or more drivers fire together we will hit the bull’s eye with ease.

What to Do?

Steep market corrections instill fear and a sense of impending gloom and doom amongst investors. At such times, it is perhaps best to take a step back, look at the bigger picture and try to answer some basic questions. 

• Is India’s fundamental growth story still intact? Largely yes. 
• Is the Government doing all it can to stem the tide?  It has made an earnest beginning. 
• Will the Government do all it can to get back on the growth trajectory? It has no choice if it has to achieve its own $5tn target. 

Add all these answers together and it should be pretty obvious what you need to do as long-term investors in the Indian markets. If you still have questions or doubts, reach out to your SEBI Registered Investment Adviser who will be able hand-hold you through this patch of turbulence in the Indian economy. 

Happy Investing.

Value v/s Growth Investing

In the business world, the rearview mirror is always clearer than the windshield.

Warren Buffett

Successful stock market investors are often bracketed in one of two categories depending on their investment style i.e. Value Investor or Growth Investor. Both these styles can generate handsome returns for investors, yet they take diametrically different approaches to stock picking. Knowing the difference between these two styles is important in building an investment strategy and a diversified portfolio. So let us first understand the key differences between these two highly popular styles of investing, which I have tabulated below for ease of understanding

	Value	Growth
Focus	Distressed companies	Companies with growth potential
Type of Company	Well established	Young
Approach	Buy low, sell high	Buy high, sell higher
Timeframe	Long-term	Short-term
P/E ratio	Low	High
Investing basis	Ratio of current share price to intrinsic value	Inter-firm and industry-firm comparisons
Risks	Wrongly assessed value	Wrongly projected earnings
Tendency to outperform	During high GDP Growth and high inflation periods	During low GDP Growth and low inflation periods
Entry pricing	Undervalued	Fair to overvalued
Volatility	Less volatile than the broader market	More volatile than the broader market

Value investing is about finding diamonds in the rough. Value investors seek to invest in businesses that are trading at a price much lower than their intrinsic value. Hence such shares are available at a bargain. They bet that markets will discover the correct value of such shares over a period of time and the price will rise. The businesses underlying such stocks are established businesses with strong cash flows and a history of consistent dividend payouts. Hence even when the price of such stocks is not appreciating much, dividend distribution may still satisfy investor’s return appetite for a while. Such stocks can become undervalued for many reasons, such as if a promoter of the company is involved in a personal scandal or if the company is caught doing something unethical. Stocks markets generally punish the occurrence of such incidents by pushing down the stock price steeply. At this point value investors step in, betting that such incidents will soon fade from public memory and the stock price will be restored to its original value. Legends of investing including Benjamin Graham and his disciple Warren Buffett, have long championed the cause of value investing

Growth investors on the other hand seek to find stocks that have the potential to outperform either the overall markets or a specific sub-segment of the market for a period of time. Growth stocks are associated with high-quality businesses whose earnings are expected to continue growing at an above-average rate relative to the market. Such stocks are generally costlier compared to their intrinsic value, but investor expectations of continued growth keeps pushing their price even higher. Such businesses often re-invest their earnings into their own growth and hence do not generally pay dividends. Investors therefore look for capital appreciation in such stocks as the only means to justify their investing decision.

Which style is better?
The answer to this question depends on the investor’s own risk profile, investing time horizon and current state of the economy. Conservative to low risk investors will prefer value stocks over growth stocks. Passive investors with a long time horizon will also prefer value stocks over growth stocks. If the economy is growing steadily then value stocks may do better than growth stocks. On the contrary, investors with moderate to high risk profile will find resonance with growth stocks. Active investors with a short to medium term time horizon will find growth stocks attractive. Finally growth stocks will certainly find more favor with investors when the economic growth itself is low.

What to Do?
First of all assess and understand your own risk profile. This will give you a good idea of how you should be investing the stock markets. Secondly assess the current economic climate on just two parameters – GDP growth rate and inflation rate. This will tell you what type of stocks to invest in. As you do this keep in mind that it is difficult to determine exactly when economic shifts will occur. Therefore if you want to err on the side of profits, you should combine elements of both value and growth investing with occasional rebalancing of your portfolio. This approach will allow you to benefit from each strategy regardless of the prevailing economic climate. This is also the approach that we follow when we pick stocks for our Client’s portfolio using our icAdvisor service. Do browse the stocks from the icTracker database that are used for delivering this service and feel free to revert with queries, if any.

The interim budget’s impact on the stock markets

I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.

Warren Buffet

The interim finance minister – Hon. Shri Piyush Goyal – presented the interim budget last Friday. Technically, the interim budget is supposed to be a stop gap budget, meant only for the express purpose of financing government expenses until the next elected government takes over. However, since it is the last budget before the general elections, historically governments have resorted to announcing populist schemes in the interim budget in order to woo the masses. And indeed, this has become the norm over the years. Hence holding true to this tradition, the finance minister doled out tons of largesse to the masses in the interim budget. Farmers with less than 5 acres of land will now get a cash benefit transfer of Rs 6000 per year directly into their bank accounts. This will benefit 12 cr farmers and cost the exchequer Rs 75,000 cr/per annum.  Allocation for MGNREGA which benefits landless farmers and laborers has been increased to 60,000cr. A mega pension scheme has been announced for the worker class who earn less than 15000 per month. The government will provide a matching contribution up to Rs 100 per month to provide them assured monthly pension of Rs 3000 per month when they retire. This will benefit 10 cr workers in the unorganized sector. Standard deduction has been raised 25% from 40,000 to 50,000. The tax-free income limit has been doubled from 2.5 lakhs to 5 lakhs. This will provide benefit of Rs 18,500 crore to about 3 crore middle class taxpayers.

So the question naturally arises – what does this interim budget do to the economy? Simply put it will put more money in the hands of the masses, increasing their spending power. It will stimulate rural growth, stoke inflationary expectations and put upward pressure on interest rates and downward pressure on GDP growth. The finance minster has already admitted that financing these schemes will increase the fiscal deficit from 3.1% to 3.4% of GDP. But analysts believe the deficit could be much higher. Financing this deficit will force the government to borrow from the bond markets which in turn will result in hike in interest rates. A small trailer of this was already witnessed when the 10 year bond yields jumped up about 1.7% immediately after the announcement of the budget!

What to hope for

As investors, the best thing to hope for is that the next incoming government comes in with an absolute majority. A hung parliament will be the worst case scenario at this time in India’s history, because then coalition compulsions will creep into decision making. In the worst case this will lead to proliferation of corrupt practices and in the best case the nation will be saddled with policy paralysis. Either way, it will be a setback for India from assuming its rightful stage at the world table. A stable majority government on the other hand will have the political support and the will to continue the path of fiscal consolidation for stimulating economic growth and the overall well being and prosperity of the nation and its citizens.

What to Do

As investors, it is futile to speculate which sectors of the economy and specifically which businesses within those sectors will do well due to the stimulus provided by the interim budget. Such top down approaches to stock picking are susceptible to errors of judgment that can go horribly wrong. A recent case in point was the big bet on the infrastructure sector five years ago by many fund managers and research analysts due to heavy spends earmarked for roadways, railways and waterways by the present government. However infrastructure stocks hardly benefitted from these spends and many of them continue to languish even till date. As investors, it is best to leave the market forces of demand and supply determine the winners and losers.
The best approach for investors is to always invest in businesses which fulfill the following three criteria:

1. Has a track record of making more money than its cost of capital 
2. Has a sustainable competitive advantage in the market place. 
3. Is available at reasonable valuations. 

The icTracker database is the only publicly available database that constantly scans stocks for these three criteria and the icAdvisor service is designed to guide investors to benefit from the findings of this constantly changing database.