Friends,
At the outset, I wish you all a very happy new year. May your aspirations come true and you continue to have healthy and happy life.
2019, following 2018, wasn’t a year which gave many people a lot of smile when they were looking into their investment portfolios. And if this was not sufficient, the leading indices of India, i.e. the SENSEX and NIFTY were raging higher and higher, making most of the portfolio being interpreted as ‘Poorly Performing’. If one had the few selected stocks in their portfolios, the portfolios shined (to name a few, HDFC twins, Reliance, Kotak, ICICI Bank). However, vast majority of the investments were reflecting what the Indian economy was going through, i.e. slow down.
To help with some statistics reflecting investor’s dilemma when they saw Sensex / NIFTY zooming, but their portfolio’s not mirroring it :
| Indicies | 2018 | 2019 |
| SENSEX | +7.23% | +14.37% |
| Mid Cap | -12.53% | -1.30% |
| Small Cap | -22.93% | -6.83% |
In the chart below, you would notice that Rs. 10,000 invested in Sensex (#2) became Rs. 11,610, invested in MidCaps (#1) became Rs. 8,861 and in Small Caps (#3) became Rs. 7,377
Source : Banyan Financial Advisors, Morning Star
From higher of 8%+ growth rates experienced in prior years, the economic growth rate continued on the downward journey, with the most recent number coming close to 4.5%. When fundamentals of a nation starts to go jittery, it is difficult to hide !
Corporate Defaults
Following the economic down turn came slews of defaults and corporate frauds. I won’t be wrong if I would say that these were originated in 2019 itself. Most of them (if not all) were coming from many years in the history, only getting identified in 2019. To name a few > Dewan Housing DHFL, Reliance ADAG group Companies, Suzlon, Jet Airways and the list goes on. Markets were even puzzled more to see that a AAA rated Company turning into a junk all of a sudden. Yes Bank squeezing from a Sensex Company to a vulnerable target. All the protective gears in a Corporate World went out of the window, be it the Rating agencies, Auditors, Risk managers, Bankers.
Lessons Learned
With each year, there are lessons which we can pickup for bettering our future investing journey. A few which I picked up to refine myself were :
- Asset Allocation – Continue to have a significant focus on asset allocation and avoid significant concentration in one sector or type of company. In simpler terms, do not keep your eggs in just one or limited baskets, spread them out. I recollect that towards the end of 2017, there was a barrage of recommendations from many brokerage houses to invest in Smaller size companies. Many of the investors who followed them outside their reasonable asset allocation got badly bruised. Every investment type has its inherent trait and trying to balance it in the portfolio is an art.
- Debt Portfolios – Chasing higher returns and ignoring the credibility of underlying Companies could give one a taste of default and 2019 gave lots of such opportunities. We believe that Debt is for managing risk and achieving stability. It may not be the best choice of an instrument to generate wealth. If one needs stability and manage the risk, compromising on the credit health of the underlying Company is a risky road to choose when it comes to Debt. I find Debt schemes as more riskier version of an investment compared to Equities. If you go wrong in Debt, it is highly likely to ‘permanent’ lose your money.
- Geographical Diversification – Once your portfolio crosses a threshold, it could be a wise option to diversify your portfolio by investing into a different geography so that you can break the correlation of your entire portfolio going down in one go. Nothing guarantees the fact that the other geography won’t tank either, but atleast you reduce the odds ! Read our article for more details > Geographical Diversification – A Key Risk Management Strategy
What We Look Forward To
After experiencing the rollercoaster ride of 2018 / 2019, followed by number of government reforms, 2020 can be a really interesting year. We start 2020 with a 4.5% GDP growth rate (people call it a slow down) and we have quite a few things to look out for :
- Indian Economy is a behemoth. An economic or fiscal stimulus would take several months / quarters to start showing green shoots. The barrage of policy interventions such as Corporate Tax Cuts, Auto policy changes, labour laws, GST, interest rate cuts and most recent the INR 1 trillion Infra Stimulus… the list doesn’t end. And the government is not pausing. Once the economy kicks (hopefully!!!), it will be fun to enjoy the ride.
- Low Interest Rates – boosts consumption, reduces cost of borrowing and motivates investments by Corporates. I am hoping this will impact both consumption and production.
- Oil and Foreign Exchange Under Control – Fingers crossed. This one thing can be a party spoiler;
- A ‘relatively’ cleaner version of Corporate India after massive write downs and closure of not so good Companies.
- For Direct Investors > Down’t blindly follow the star ratings. That majorly means how an investment performed in the past. 2020 and beyond may be much different for the currently 5 star rated investments. Be particularly be geared against 5 star debt schemes to avoid a rude shock.
Can we expect a positive return – your guess is as good as mine. But there are things which are happening in the background. In the mean time, take opportunity to add more to your portfolio at depressed valuations. Most of the wealth is made by investing in these times.
I wish you and your portfolios a very healthy and hopefully a green 2020 year-end.