2020 - Letter to Clients

 

2020 is a year which all of us who have lived through it will remember for a very long time. At the start of the year, ‘pandemic’ was a term that to the vast majority of us was a word restricted to the dictionary. But by the end of the year, that changed drastically as it became a household syllable. All of us can righty claim to have lived through a pandemic now. The Covid19 pandemic affected every aspect of every one’s lives all around the world. This virus originated in Wuhan in China in late 2019 and just three months later it had spread around the entire world. So rapid was the spread of this virus that governments worldwide had to resort to complete lockdowns of various durations in order to stop it from spreading and multiplying further. City after city around the world started resembling ghost towns due to lockdowns, and entire economies worldwide came to a grinding halt. In this scenario, investors resorted to safety and flocked towards Gold. Consequently Gold became the star performer for the second year in a row. Here is how various asset classes performed during 2020 in India.

Asset class	2020 return
Gold	27.00
PPF	7.10
NSC	6.80
Debt ultra short	5.13
Post office 3-year deposit	6.90
Debt Liquid	3.96
Fixed deposit (1-3 years)	5.30
Nifty 50	14.90
Nifty Midcap 100	21.87
Nifty Smallcap 100	21.47
icAdvisor average	39.71

That Gold gave the best return amongst the above asset classes during the pandemic was not that much a surprise. The bigger surprise was that the Nifty managed to give a positive return at all. The pandemic had so scarred investor sentiment during March and April that the turnaround during the rest of the year was nothing short of sensational.  In the midst of all of this, I am happy to report that the average performance of all icAdvisor managed portfolios during the year clocked in at just short of 40%. This was almost thrice as much as the Nifty and about twice as much as the Midcap and Smallcap indices. Here is how many of our client portfolios outperformed these three indices in percentage terms during the year

Index	% folios outperforming the index
Nifty	88.46
Nifty Midcap 100	80.77
Nifty Smallcap 100	80.77

The Nifty saw two trends during the year – a big downtrend at the start of the year followed by an even bigger uptrend for the rest of the year. The quantum and duration of these trends were as follows:

Trend	Quantum%	Period
Downtrend	-38.6	Jan to Mar
Uptrend	80.4	Apr to Dec

These two trends can be easily seen in the daily chart of the Nifty during 2020 below.

Nifty ended the year at a PE of 38.45, very close to its lifetime high of 38.55 reached the very next day! At these dangerously high PE levels Nifty stocks have only two possibilities – either deliver increased earnings to justify the stratospheric PE or face a price correction. The December quarter results which are starting later this week will be interesting to watch from this point of view. 

On the economic front there was bad news all around. Annual GDP growth went into negative territory for the first time in decades. GDP growth slumped to -23.9% for the April-Jun quarter and then improved slightly to -7.5% for the July-September quarter. Two quarters of consecutive negative growth implies that technically we are in a recession. It is in this context that the GDP numbers for the October-December quarter are keenly awaited. Unemployment continued to be high and GST collections also slipped during the year. These and other indicators have put the Governments target of $5tn economy by 2024 at serious risk, to the point that no one is even talking about it anymore. The focus at the moment seems to be to stop the spread of the pandemic so that the economy can recover back to normal. The problem created by the pandemic was compounded by China’s military expansionist activities in the Ladakh region. This forced the Government to move military resources heavily into that region, putting further stress on the finances of the Government. The upcoming annual budget will be interesting from this context. 

What can be look forward to in 2021? Here is Nomura’s GDP forecast for leading economies in Asia for the next two years

Nomura predicts that India will be the best performing economy in Asia in 2021, growing at 9.9% which will be even faster than China’s 9.0%. The stock markets have run up already in anticipation of this forecast and Nifty has hit a lifetime high at the end of the year. Quality Midcap and Smallcap stocks have run up even more than the Nifty. Hence the entire market is very costly at the moment in anticipation of this high growth. The December quarter results will give us a glimpse of which stocks will be at the forefront of this growth.

At the end of this difficult year, it is a good idea to take a moment and review the fundamentals of long term investing. We enumerate them here for quick reference:

1. Asset allocation – Diversify your financial assets across Debt, Equity, Real Estate, gold, International Equity, etc. depending on your risk profile and age. Real Estate and Gold assets should ideally be used to satisfy consumption needs only. One simple rule of thumb to do this quickly is to subtract your age from 100. The number you get should be the percentage of your assets that you should allocate to equity - the rest should be allocated to Debt and other assets.
2. Financial planning - Identify your financial goals and classify them by time horizon – short term, medium term and long term. Use Debt assets to achieve short term goals, mix of Debt and Equity assets to achieve medium term goals and Equity assets for achieving long term goals. This will be the basis of your financial plan.
3. Reviewing your plan - Review your financial plan yourself or with the help of your advisor at least once a year and make adjustments to your asset allocation depending on the prevailing market situation.
4. Invest right - When it comes to equity, invest in quality businesses and then have the patience to allow markets to give you returns. This calls for having patience even in the face of volatility. Speak to your financial advisor whenever you are in doubt and need a second opinion.

I want to take this opportunity to thank you for putting your faith in our investment thesis and in our icAdvisor service with your hard earned money. Your continued trust makes us stay committed to the vision encapsulated in our tagline – ‘Growth through Knowledge’. I am available to address client queries at all times and am approachable via email or whatsapp. 

Finally 2021 will also be the year where the focus will shift from the pandemic to vaccinating the population. It is in this context that I wish you and your family a very healthy, happy and prosperous Happy New Year in the hope that our relationship will continue to strengthen and grow in the years ahead! 

Abhijit Talukdar

Founder, Attainix Consulting

SEBI Registered Investment Adviser - INA000006703

Corona virus – what to do with your portfolio now

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.

Warren Buffett

As I write this post, we are in the middle of a ‘Janata curfew’ – a voluntary lockdown in the entire country, initiated by Prime Minister Modi to impose social distancing on the entire population. That and washing hands frequently are the only two weapons we have against this global pandemic at the moment. This virus is unlike anything that humankind has ever seen before. It spreads so rapidly that it can overwhelm entire healthcare systems in a matter of days. We are seeing that scenario being played out right now in Italy and Spain. The ‘Janata curfew’ is therefore to be treated as a trial run to ensure that we do not get to that point as a nation.

However lockdowns have mega side effects, especially economic ones. The benchmark Nifty has already fallen 30% from the top in anticipation of a slowdown of the economy. If this pandemic does not appear to be coming under control anytime soon, the index could fall even further. PM Modi has also setup a task force under the leadership of the Finance minster to take stock of the situation and recommend appropriate stimulus actions. This is a good move unlike some other countries which have announced various kinds of bailout packages, which appear to be knee jerk reactions. We need considered measures to stimulate the economy at this time, not knee jerk announcements. So what will this task force recommend? Here are the possibilities in no particular order

• Doles – Daily wage laborers and contract workers who will lose their daily wages due to this slowdown may get some money credited directly into their bank accounts to help them sustain through these difficult times. Some states like Delhi and Karnataka have already announced the same.
• Interest moratorium – Public sector banks may be asked to give one or two month moratorium on interest payments for loans availed by their Customers. Private sector banks will have to match this in the interest of public sentiment.
• Deferred payments – Public sector insurance companies may be asked to defer policy premiums by one or two months without lapsing the policy. Private sector insurance companies will have to match this in the interest of public sentiment
• LTCG suspension – Long term capital gains tax on equities is at 10% whereas Short term capital gains tax is at 15%. The difference of 5% is not enough incentive for investors to stay invested. Hence LTCG on equities may be removed or suspended in order to encourage investors to stay invested and reduce the volatility in the capital markets
• STCG increase – Anticipating a bounce back rally in the near future which many traders will make money in the short term, the Government may increase STCG temporarily to benefit from this situation. The fact that the Government has not yet reduced prices on petrol and diesel despite international crude prices crashing makes this a real possibility.
• Increased spending – Government may announce increased spends in key infrastructure sectors such as highways, railways, ports, transportation, health, education and housing
• Interest rate cut – RBI may cut long term interest rates in order to make it cheaper for businesses to borrow capital and revive their growth
• Tax cut – Government may announce an income tax cut especially for the middle class in order to put more money into their hands.

What to Do?

1. All equity investors have taken a significant hit on their portfolio in the past few weeks. This is now a good time to review your portfolio and replace stocks which have fallen significantly with those that will benefit from the above stimulus announcements. Some educated guesswork is required no doubt in this process, but sectors like pharma, healthcare, consumer goods and chemicals are good choices at the moment. Making good picks from these sectors will help you recover your portfolio loss quickly when the bounce back happens. 
2. This is also a good time to review your asset allocation, which has become distorted due to the correction in the stock markets. Moving some part of your debt allocation to equities in order to restore your asset location is also a good idea at this time.
3. If you are invested in credit risk funds or corporate bond funds you need to be extra careful. The slowdown may turn into a recession if the pandemic continues for a few months which in turn may trigger defaults. Overnite funds and/or Gsec funds are the preferred debt instruments for now.

If you still have questions or doubts, reach out to your SEBI Registered Investment Adviser who will be guide you through this patch of global turbulence.

2019 - Letter to Clients

After a lackluster 2018, 2019 turned out to be another difficult year in the stock markets for Indian investors. Here is how the year panned out for various asset classes during the year.

Asset class	2019 return
Gold	23.8
PPF	7.90
NSC	7.90
Debt ultra short	6.92
Post office 3-year deposit	6.90
Debt Liquid	6.32
Fixed deposit (1-3 years)	6.25
Nifty 50	12.02
Nifty Midcap 100	-4.32
Nifty Smallcap 100	-9.53
icAdvisor average	-2.84

No one could have guessed it at the start of the year, but Gold was the star performer during 2019. Appreciation in Gold, an unproductive asset, normally signals a defensive approach by investors. The stock markets were anything but defensive though. The Nifty started the year at 10,862 and ended it at 12,168 – giving a healthy return of 12.02% in the process. The Nifty Midcap 100 and Nifty Smallcap 100 on the other hand gave negative returns of -4.32% and -9.53% respectively. This was the second consecutive year when these two indices gave negative returns. This means that investors with growth portfolios in the midcap and smallcap space will have to increase their investing timelines in order to first break even and then generate a positive return. As far as our icAdvisor advisory service is concerned, the annual return of client portfolios under our advice clocked in at -2.84% this year. More than 90% of our client portfolios are Growth oriented and with this constraint we were still able to outperform both the Midcap 100 and Smallcap 100 indices. Here is how many of our client portfolios outperformed the three indices in percentage terms

Index	% folios outperforming the index
Nifty	32
Midcap 100	68
Smallcap 100	79

 2019 was also a year which was marked by a peculiar trend – large cap quality stocks that were already costly became more costly at the expense of quality midcap and smallcap stocks, which were shunned by investors as being too risky. This led to a situation where the Nifty ended the year at a PE of 28.3, very close to its lifetime high of 29.9 and two standard deviations away from its average of 19.8. At these dangerously high PE levels Nifty stocks have only two possibilities – either deliver increased earnings to justify the stratospheric PE or face a price correction. The December qtr results which are starting later this week will be interesting to watch from this point of view.

In terms of trends the Nifty once again saw three broad trends during the year – two uptrends and one downtrend. The quantum and duration of these trends were as follows:

Trend	Quantum%	Period
Uptrend	14.3	Jan to Jun
Downtrend	-11.9	Jun to Oct
Uptrend	15.0	Oct to Dec

This can be seen visually in the daily chart of the Nifty during 2019 below

The previous year also witnessed three broad trends in the Nifty and 2019 continued this trend. Consequently volatility remained high during the year. In response to this volatility we continuously advised our Clients to sit on cash whenever possible. During the end of the year we saw the emergence of a new trend although in small proportions – booking profits in stocks that had run up way too much and investing into quality names in the midcap and smallcap space. 2019 was also marked by a lot of upheavals in individual businesses, notable among them being DHFL, Mcleod Russell, Cox and Kings, Thomas Cook, Yes Bank, Sintex, Reliance Home Finance, Reliance Communications, Café Coffee Day, Jet Airways, Reliance Power, Reliance Capital, Jain Irrigation, Lakshmi Vilas Bank, Vodafone Idea and HDIL amongst others. All of these stocks lost more than 80% of their market cap during the year. It was perhaps the consequence of this kind of literal carnage in so many stocks that investors flocked to quality large cap names and kept pushing up their price to stratospheric levels!

On the economic front there was bad news all around. The GDP growth rate slumped to 4.5% during the year, the lowest growth rate in decades. Unemployment continued to be high and GST collections also slipped during the year confirming a slowing down of the economy. These and other indicators have put the Governments target of $5tn economy by 2024 at serious risk. On the bright side, the Government was active in acknowledging the problem and took many remedial steps to reverse the trend including a lowering of corporate tax. The cumulative effect of these measures is likely to show result in the next couple of quarters.

What can be look forward to in 2020? The Indian economy has slowed down but the Government is making all efforts to revive it once again. The fact that the elections are behind us and that there is a stable Government at the center with an even larger mandate is assuring for investors. The stock markets have run up already in anticipation of the moves made by the Government. Quality large cap stocks are trading at stratospheric levels and are due for a correction unless their December quarter earnings support their high prices. Quality Midcap and Smallcap stocks however are looking very attractive at the moment. This I believe will be the sweet spot for 2020.

At the end of this difficult year, it is a good idea to take a moment and review the fundamentals of long term investing. We enumerate them here for quick reference:

1. Asset allocation – Diversify your financial assets across Debt, Equity, Real Estate, gold, etc. depending on your risk profile and age. Real Estate and Gold assets should be used to satisfy consumption needs only. It means that your financial assets should be invested only across Debt and Equity. One simple rule of thumb to do this quickly is to subtract your age from 100. The number you get should be the percentage of your assets that you should allocate to equity - the rest should be allocated to Debt.
2. Financial planning - Identify your financial goals and classify them by time horizon – short term, medium term and long term. Use Debt assets to achieve short term goals, mix of Debt and Equity assets to achieve medium term goals and Equity assets for achieving long term goals. This will be the basis of your financial plan.
3. Reviewing your plan - Review your financial plan yourself or with your advisor at least once a year and make adjustments depending on the prevailing market situation.
4. Invest right - When it comes to equity, invest in quality businesses and then give markets time to give you returns. This calls for patience in the face of volatility. Speak to your financial advisor whenever you are in doubt and need a second opinion.

I want to inform all my Clients that during the year we made further improvements to our stock picking algorithm. These improvements include using advanced technical indicators in addition to fundamental indicators to ensure that we get the timing of investments right also. I believe these improvements are already working in favor of our Clients.

I also want to take this opportunity to thank you for putting your faith in our investment thesis and in our icAdvisor service with your hard earned money. Your continued trust makes us stay committed to the vision encapsulated in our tagline – ‘Growth through Knowledge’. I am available to address client queries at all times and am approachable via email or whatsapp. 

Finally, let me wish you and your family a very happy and prosperous Happy New Year and hope that our relationship will continue to grow for many years to come!

Abhijit Talukdar

Founder, Attainix Consulting

SEBI Registered Investment Adviser - INA000006703

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.