Investment Notes – Euphoria

March 14, 2017March 16, 2017

Three positive events have occurred. Demonetization is over; the Feb 2017 budget was good, and the 5 state elections threw up BJP as a likely winner in 4. At this point, we are overwhelmingly positive on the investment outlook.

Investment Notes

It was 18^th Feb 2015. The Sensex had just closed at 29,320. It had been 9 months since the Modi led BJP won the parliamentary majority – they got 272 seats – to form a government. In the last one year, the Sensex had jumped from 20,536 to these levels, a gain of 43%.

An investor asked me a simple question: So what has changed on the ground and among the companies that has resulted in a 43% jump in Sensex? I just nodded, unable to express the reasons. I’d like to try to answer this today. The simple answer – NOTHING !! Most of the companies were 5-10% up on financials/ EPS in the last one year. Nothing special to report here.

So what gives? What explains the big jump? The answer is optimism and sentiment. Just like most things in life, people act on the basis of heart (emotions) and head (rationality). The Modi govt. won a resounding victory, after a bitter, negatively fought election. A lot of people now looked to the future with renewed hope and optimism, and felt we have a govt. that is cleaner, more decisive and which is thinking long term.

The positivity changed the outlook of investors. Retail bought Mutual Funds. Investors took fresh 2-3 year, long term positions. FIIs entered and took new 10+ year investments on the basis of longer term trends like consumption and housing shortages. Sensing all this, traders bet positively.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham

So while nothing changed on the ground, the 2 year forward outlook changed sharply. The stock market always tries to look a few years ahead. At a stock level, most large caps have 1-2 year financials baked into the prices. Mid-caps are divided into the well-known and the lesser known. The well-known firms too have 1-2 year financials baked into the prices. Since growth rates are higher here, valuations parameters like P/E and P/B can look expensive. The lesser known mid-caps and small caps can flounder at low valuations until they get discovered. Many opportunities are available here for investors to find high quality firms that can be great investments.

So what happened after Feb 2015? The 43% jump due to euphoria and positivity gave way to rationality. Whats really happening on the ground? Is business looking up? What big bang reforms are the govt. conducting? The answers were not immediately obvious. The parliament became a logjam – the lower house had things easier but the upper house blocked new initiatives. Massive industry specific issues such as coal and power can’t be wished away with a govt. owned magic wand. It takes time and resolve and good administration.

Post Demonetization Post Budget

By Feb 2016, the Sensex had fallen to 23,154, a fall of 21%. Post budget, once again there was optimism. The govt. has given a positive budget. No major worries. Toward Nov 2016, we had demonetization. There was confusion, discomfort and a cash shortage. Recovery from this started by end Dec. The cash shortage now looked likely to be resolved in a few months with few residual issues. Recovery was sharp, aided by another good budget in Feb 2017.

The Budget 2017 was overall positive. Small sops for the people included lower tax at entry levels. There were benefits for real estate transactions and Industry status for affordable housing. There were no major negatives, and fears dissipated. GST is likely in 2017-18.

The direction from the govt. is very clear. Black money is to be legalized and cleansed, and black money sources are to be capped. Cash and real estate cannot be a store of ill-gotten wealth. Taxation and compliance has to go up. Big ticket reforms are to be made, opening up new sectors. Foreign and local investors must be encouraged. Abject poverty has to be eliminated. The average man is honest, hard-working and follows the rules. Lets make life easier for him. Plus big changes have to be made to make the country a better place. All subsidies must be targeted using Aadhar to avoid waste. We hope that tax rates – both direct and indirect, are peaking now, and as compliance improves, rates should ease.

The FIVE State Elections

The 5 state elections of Uttar Pradesh, Uttarakhand, Punjab, Manipur and Goa have just concluded. Its been a strong victory in the biggest state, UP, and Uttrarakhand, for BJP. Manipur and Goa may also go BJP way per latest reports. So even the tricky UP population is convinced. In a delayed fashion, BJP will also get more seats in the Rajya Sabha. While it is unclear when BJP will get majority, but certainly over time the statewise support for BJP will increase.

These three big positives combined makes things look good for a 3-6 month period.

We signal a new euphoria for the Indian market

We welcome – the Bull

India and USA markets:

Just like in India, there appears to be an election led upswing in the USA. The Trump administration too is looking to take bold steps. The focus is on domestic improvements. Jobs, some elements of domestic protectionism, better healthcare, etc. Optimism has shot up in USA. Rather than fearing the world, USA may move to strengthening its own country.

A quick look at Sensex and Dow Jones over the last 2 years indicates a good correlation. See figure – thanks Google Finance. Barring some big local events like demonetization, the two markets are moving in sync. This is another factor that makes me positive about Indian market outlook – its difficult for Indian indices to outperform year after year unless at least some of the global markets are also moving in a similar way.

The potential Risks or negatives that I see now are – 1) Fed rate hike expected this week – will it affect Indian Indices? 2) INR strengthening against USD – is this even possible? 3) Higher inflation – we have early signs of increase 4) Bad monsoon in 2017.

There are always risks and negatives. But at this point, we are overwhelmingly positive on the investment outlook.

JAINMATRIX KNOWLEDGE BASE

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in any company mentioned here. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any equity investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Investment Outlook – Short Term Pain, Medium Term Gain

November 22, 2016

22nd Nov 2016
Report Type: News Analysis

Recently the global markets have been very volatile and the same is being witnessed in the Indian markets as well. The Sensex has fallen around 12% from peak of 29,045 on 8th Sept, after a 26% rise since the 2016 budget. Here are the key events which have likely affected the mood of the market.

I) Demonetization:

The high value currency notes of Rs 500 and Rs 1000 were demonetized on the 9^th of Nov, 2016. Just overnight 86% of cash in INR has become obsolete. This measure was taken by the govt. to 1) tackle the widespread presence and hoarding of undisclosed (black) money and 2) destroy the counterfeit notes in the economy. A 50 day window till 30^th Dec was given by the govt. to public to deposit or exchange these high value notes.

Per estimates about Rs 14.73 lakh crores is in the form of 500/1000 Re notes, and these will be replaced with new Rs 500/2,000 notes which are being distributed by bank branches /ATMs.
On 22nd Nov, the RBI eased NPA recognition norms as many SMEs, Agri and other business making cash based settlements/transactions could face repayment issues. RBI has given additional 60 day limit for Banks and NBFCs to recognize loans as NPA over and above standard regulatory limits for dues payable between 1st Nov – 31st Dec 2016 in cases where sanctioned limit is below Rs 1 crore.

The Cash categories are:

Daily cash for individuals and businesses: There is a short term pain as people have to wait in queues outside banks and ATMs to deposit, withdraw or exchange money. We expect this to continue in urban areas for 10 days and semi-urban/ rural for another 2 weeks. Already limits are being raised for individuals & businesses. Online /mobile payments are gaining acceptance. New bank accounts will grow; usage of Jan Dhan Yojana accounts has begun.
Black/ undisclosed cash: Over many years, cash has become a massive store of wealth in India. The reasons were convenience and lack of bank accounts on one side, and to avoid tax, under-declare property values, run illegal business, naxalite movement, etc. on the other. It is estimated that 25-40% of above 14.73 lakh crore of cash is undisclosed. This money is expected to either 1) be deposited in bank accounts and declared, accruing taxes and converting to white, 2) Some of this may leak out to other asset classes like currency, gold, real estate, forex and other people’s bank accounts 3) Be destroyed so as not to leave a trail.
Counterfeit / fake currency: There is a reported presence of fake currency in the system, which is debasing the banking operations. By collecting all high value notes and issuing new ones, these will be flushed out of the system. It’s difficult to estimate this type of cash.

Fig 1: Ring out the Old, Ring in the New

Impact: For individuals and in business, there will be some disruption before we limp back to normalcy. This will be worse in rural areas with poor banking penetration.

But 30 years of cumulative black money will in one stroke be converted or destroyed.
This cash exchange, coupled with GST, may radically alter consumer behavior. Bank accounts usage will multiply, as also money transfer facilities and transparency.
The govt. is trying to switch from equilibrium in Tax Non-compliance to one in Compliance. In other words break a vicious circle of saving in black money to a virtuous circle of white money.
The market sentiment in the short term is affected as several cash oriented sectors may be impacted. Real estate, jewellery, microfinance / NBFC and retail operations may be affected. However the new 22nd Nov rule will ease liquidity for NBFCs and allow operations to stabilize.
Data available today indicates the money deposited with banks by customers crossed Rs 6 L crore from Nov 10, after demonetization. Withdrawals, including exchange of old notes, were above of Rs 1.35 L crore (per IBA). We estimate that in another 10 days, the depositing should be complete. The withdrawal / exchange of notes may take 2-3 weeks more to meet daily cash needs.

II) US election results:

Donald Trump won the 45^th US Presidential elections on the 9^th Nov, 2016. This was against the market consensus of various polls indicating a win for Hillary Clinton, thus shocking many Americans and investors worldwide. After the initial surprise, the US markets stabilized.

Impact: We expect the US policies to change once Trump takes over presidency in Jan 2017. The immigration, foreign business treaties, tax rates and a host of domestic policies may change. The impact on Indian investors too will unravel over 6 months. There is a higher uncertainty in US markets. Some FIIs are pulling out funds from Emerging Markets in a Risk off move. However after an initial knee-jerk reaction, this may not continue.

III) Tension along the India – Pak Border:

Indian stock markets fell almost 2% on 29^th Sept, 2016 after the Indian army conducted “surgical strikes” on terror launch pads across the Line of Control (LoC) in Jammu and Kashmir amidst rising tensions between India and Pakistan. Thus the Indian side has taken a firm stand against terror from Pakistan. This event has been followed up with many incidents of firing on both sides and disruptions along the border.

Impact: We feel that there will be ongoing tensions between India and Pakistan. However a war like situation might not come up. Though the issues are unlikely to be solved soon, negotiations and dialogues should happen. Any aggressive attacks from either side could lead to a short term fall in markets. There is a higher uncertainty.

IV) Tata Group Clash:

The Chairman of the Tata Group, Cyrus Mistry was ousted from his post. The past Chairman Ratan Tata took over and will appoint a new Chairman within 2-3 months. The main reason for this was stated to be a loss of confidence in Mistry. This sounded like a painless coup for investors but the spat between the two has gone public, and it may be some time before the changes are rolled out across the group.

Impact: We feel that the operations of most companies will not be affected in the near term. Some strategic direction may be changed. The aggressive and combative stand of Tata group seen in recent cases like Tata Corus and Tata Docomo may soften in line with group philosophy.

Indices movements: Sensex, Nasdaq, S&P 500 and Dow Jones

Fig 2 – Index movements – 1 year

We can see that there has been a fair correlation between Indian and USA markets over 1 year.

Fig 3 – Index movements – 1 week

But over the last week, perhaps thanks to demonetization and the Trump election, Sensex has fallen relative to other markets.

Conclusions

There has been a sharp fall in Indian indices and many stocks from recent peaks. The fall reflects a break in the positive run, an increase in uncertainty and sudden unexpected events. It’s not all bad news. We feel that most of the events are short term disruptions, with a recovery possible in a period of 2 weeks to 3 months.
This is a correction in an overall bull run as we are seeing a lowering of interest rates, positive moves on GST and 7th pay commission and until recently, steady investments from FIIs and domestic retail. The IPO market too has been euphoric with a lot of pent up demand from retail investors.
This short term fall is a buying opportunity if you have a time horizon of a period longer than 3 months.

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Disclaimers

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

JainMatrix Investments presents the Outlook for 2016

December 28, 2015January 7, 2017Leave a comment

Date – 21st Dec 2015

At JainMatrix Investments, we expect the following to happen, in the rest of 2015 and 2016:

US Fed to start raising interest rates. The US Fed has to get off the floor in terms of interest rates, and try to restore normalcy in its outstanding debts, asset prices and liquidity. Painful but necessary.
Crude Oil prices to stay depressed. Crude oil production is not slowing down. OPEC is happy to boost volumes. Low prices boost savings and wealth in India. On the other hand, growth in the economies of Europe, Japan and China are flat or worse. The surprise may be renewables, where new power generation capacities may match fossil fuels in terms of (unsubsidized) power costs, crossing an economic tipping point.
- Sectors such as paint, tyres, FMCG, airlines and lubricants are gaining from lower costs.
- Indian Oil and Gas – Exploration and Production firms will need to get used to lower profits.
GST to see the light of day but in a diluted, trial fashion. After a decade of parry and thrust, the law makers may have to bow to the inevitable. GST should roll out in 2016. However it will have to be introduced in a calibrated fashion so that States are able to handle the losses & gains across sectors.
- We feel that FMCG, pharma, power sector, logistics and auto & auto ancillaries would be the sector gainers from GST implementation.
Structural reforms to continue in India, capex cycle to revive. The fall in costs across crude, fuels, metals and agro commodities will continue to boost the economy for 2-3 years. Flush with both funds and purpose, the Govt. of India will spend its way out of slow growth. Subsidies and inefficient expenditures may reduce, while investments in infrastructure, urban development, transportation and government reform look likely.
- In the private sector, our positive sectors are infrastructure, capital goods, consumption, pharma, exports, IT, textiles, autos and auto ancillary.
- Several profitable PSUs will also be operationally freed up, and even undergo disinvestment.
- The dynamic firms in BFSI will gain a lot but others will weaken and see some M&A.
India to continue as an emerging markets leader. With some financial stability controlled by a visionary RBI, India could top growth rates among large and emerging economies for many years. The current economic cycle uptick will also attract global funds.
In the telecom sector the Reliance Jio launch will see incumbents face off with this new player.
The sectors to avoid are Oil & Gas (E&P), metals and telecom. The real estate industry may grow even as prices remain depressed.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

MidCap Portfolio – Come, Invest in India

August 20, 2014August 20, 2014Leave a comment

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Date: 19th Aug 2014

JainMatrix Investments launched its Mid and Small Cap portfolio in Feb 2013. This is the fifth update report on this portfolio, along with a brief investment note.

(Our portfolio is only shared with Subscribers, but here’s the Investment Outlook from this report).

Mid/Small Cap Model Portfolio – Aug 2014 – Investment Outlook

It’s been only 4 days since Independence day, but in these 4 days, a lot has changed in terms of our business and economic outlook. On I-day, India’s PM addressed the country and spoke about his concerns, his desires as PM, and his new initiatives through governmental action and funding.
I will not go into any specifics. All I can say is that the PM feels strongly about the right things. This is a PM of stature. He is the right man in the right place. In 5 or 10 years as ‘Prime Sewak’ he will be able to give a new direction to governance, business and economy in India. He has also set up a powerful team to execute on his ideas.
Indian business has in the past made their achievements in a tough environment in terms of govt. policies. So if these improve, things can only get better and easier from here for business.
The PM’s brilliant call rings in my ears – Come, Make in India. On these lines, our title theme is – Come, Invest in India.
Post budget, the markets were in a down mood after those heady days, and had some doubts over the next few weeks, but we are now past that. More than before, it’s now time to be positive in the market. Stay invested in well-chosen stocks.
We notice a pattern in the mid & small cap shares. After highs around the budget time, many of these have corrected sharply thereafter. And after a fall, started recovering. Investors need to understand that by their nature, these shares are volatile and move rapidly in both directions in the short term. In general, investors need not get overly concerned about sharp movements. Typically a positive event (budget) that gave new highs to many firms, may be followed by a technical correction, which again may be followed by a recovery (if fundamentals are strong).
The INR/USD is at 60.7, and should be in a 60 +/- 2 band for a few months barring extreme events.

Embed from Getty Images

Portfolio Theme and Performance

The investment theme continues to be – IT and Auto ancillary exports, infrastructure and rural/ semi urban consumption. The investor should continue his wealth building process with Mid and Small Caps.
In a very positive environment, the portfolio performed very well. On average the 7 Buy recommendation shares were up by absolute 104% and annualized 89%. But including the two Holds the portfolio gained by absolute 77% and annualized 67%.
The CNX Midcap, BSE Midcap and BSE Smallcap are benchmark Indices, and were up by 33.7%, 33.8% & 44.6% absolute in the period. The JM active Mid/Small Cap portfolio outperformed by 59%.
Investors need to continue to invest in these shares in a SIP mode.

The rest of this report is shared with only current subscribers.

Some previous updates for the JainMatrix Investments Mid and Small Cap Model Portfolio

JainMatrix MidCap Model Portfolio outperforms benchmarks by 50% – June 2014
Investment Note – March 2014
Investment Note – November 2013
Investment Note – March 2013
Investment Note – Feb 2013

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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Investment Notes – Euphoria