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

Berkshire reports its biggest quarterly loss ever. Buffett does mid-course correction.

In the business world, the rear-view mirror is always clearer than the windshield.

Warren Buffett

On 2nd May 2020, Omaha based financial conglomerate Berkshire Hathaway (NYSE: BRK.B) reported a net loss of $49.75bn for the 1st quarter of 2020, its biggest quarterly loss ever. This includes $70.28bn of mark to market losses in investments and derivatives. Berkshire stock has corrected more than 10% - from $190 to $170 - from mid April to mid May on the back of these results. This 10% correction is in stark and dire contrast to the SP500, which has moved up by about 3% - from 2783 to 2863 - over the same period.

Granted that the bulk of the losses reported by Berkshire are mark to market losses which is system-wide and holds true for everybody - what was the reason for the markets to punish Berkshire stock by 13% vis-à-vis the SP500 in the span of just one month? The only explanation is that the markets were not very comfortable with Berkshire’s investment holdings anymore, in light of the impact of the Corona pandemic on the world economy. Buffett himself pre-empted this move by selling all airline stocks in his portfolio, including American Airlines, Delta Airlines, Southwest Airlines and United Continental. Berkshire owned approximately 10% of each of these airlines and no doubt the unloading of such a big quantity of shares in the stock market would have been possible only at rock bottom prices. Suffice it to assume that Berkshire would have taken a significant hit in this share sale. More importantly though, in selling all airline stocks together, Buffett debunked his own ‘Buy and Hold for life’ philosophy once and for all. We at Attainix Consulting have been saying consistently that the ‘Buy and Hold’ approach does not make sense in the Knowledge economy anymore, since new upstart businesses can disrupt existing established business very quickly. But now that the master himself has reneged on his own words, I guess his actions will speak louder than his words to the millions of his ardent followers worldwide!

But hold on we are not finished diagnosing the action of the markets on Berkshire stock yet. It appears that the markets discovered a bigger problem lurking underneath in the Berkshire folio. See the top 15 holdings in the Berkshire portfolio at the end of 2019 below. What do you notice?

Well I noticed 3 stocks in Airlines, 6 stocks in Banks/Investment Banking, 2 stocks in Card services, 2 stocks in Technology and 1 stock each in Credit Ratings and Beverages. If ever a case was to be made for putting too many eggs in the same basket, then the above portfolio would win hands down! Of the top 15 holdings, 3 are in Airlines and 9 are in Financial Services – of which 4 are Banks. Buffett sold all his Airlines stocks because he believes people will not fly so much anymore after the pandemic – also the fact that video communication has woven itself in every one’s lives. But what about Banks – will their non performing assets not swell as a result of the pandemic? Sure they will, and that is exactly why the stock markets have been punishing the Berkshire stock. The problem for Buffett is that his Bank holdings are so large that he cannot hope to sell them like he sold the airlines, without disturbing the entire market and shooting his own foot! 

So there you have it – the world’s greatest investor has been found to hold multiple stocks in the same sector in his top 15 holdings – a mistake which even a novice portfolio manager would not make. But such is the aura of mega investors that when the going is good such mistakes are overlooked as genius moves. No wonder then, this situation reminds me of one of Buffet’s own quotes – “Only when the tide goes out do you discover who's been swimming naked”. 

Having said all of the above, I should remind you though that Warren Buffett is still sitting on $137bn of cash. This is like an elephant gun which he can use to correct his own mistakes over time. But can you? Do you have tons of cash that you can deploy to correct blunders in your own portfolio that have been exposed by some unforeseen event? If not, get help. Hire an expert to advise you on your portfolio, if nothing else to detect and avoid common blunders well in time.

Corona pandemic – rebalance your portfolio now

Only when the tide goes out do you know who has been swimming naked.

Warren Buffett

We are now in the 13th day of a three week lockdown in India that is being enforced by the Government to arrest the spread of the global corona pandemic which has gripped the entire world. The speed with this virus has spread all over the world is truly terrifying. But perhaps it indicates how much people are on the move nowadays, and how much more they have to travel regularly in today’s commercial world. As of today more than 90 countries and half of humanity is in complete or partial lockdown all over the world! This is because the most effective way of stopping this virus from spreading is to maintain physical distancing from everyone else.

As I had mentioned in my previous post, lockdowns may stop the virus from spreading but they have economic consequences. Shutting down businesses means people lose jobs. The Government is urging many employers to let their employees work from home. While this is eminently doable for services business, it is hardly possible to implement work-from-home in the manufacturing sector. Even if people do not lose jobs, their income will be curtailed in the short term reducing their purchasing power thus negatively impacting the economy. Governments have announced major fiscal stimulus packages in anticipation of such economic slowdowns. There have been debates in some countries whether the economic cost of a lockdown will be more than the damage caused by the virus itself. That is why the response of Governments around the world to this virus has been different. This is illustrated nicely in the chart below

Notice that India is highest on the stringency scale and lowest on the fiscal stimulus scale on this chart. What does this imply – in short it means that India has the best chance among all these countries to be the least affected (economically) by the virus. And in case India’s containment strategy falls short, the Government has more room to announce more stimulus packages in the future. As of today, when I compare the corona virus numbers, India’s strategy seems to be working - touchwood. Notice also that China which adopted a less stringent policy than India has already started coming out of the lockdown and has started resuming normal manufacturing activities, in less than three months. You can extrapolate this to estimate yourself how soon normal life will start resuming in India.

The United Nations estimates that only China and India, among the large economies, will come out of this pandemic with a positive GDP growth rate. The rest of the world will go into a recession. The chart above certainly gives credence to this forecast. If you also believe that the India growth story - while impacted in the short term - is going to be largely intact in the medium and long term, then this is the right time for you to do the following:

• Review your portfolio now and rebalance it to invest into those businesses that will be the beneficiaries of India’s growth story.
• Review your asset allocation. It is likely that your exposure to equities has fallen due to the correction in the stock markets. This is the time to restore your asset allocation by moving some money from debt to equities.
• Diversify your portfolio as per your own risk profile. Be aware that too much diversification may negatively affect your returns.
• Keep at least six months of living expenses in cash/liquid instruments. 
• Finally, stay calm and stay invested.

Having said all of the above, Be aware that this is the time to be aware and alert. There is no room for complacency, because of the possibility that the situation may get worse before it gets better.

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.