Monday, December 23, 2013

Aam Aadmi Party- Today is an important day in India's history

Politics in India takes an interesting turn today. Aam Aadmi Party, the new hope on the horizon, takes control of the Delhi Assembly. There is a lot of hope and expectations from many. No one gave AAP a chance. The coming of age of AAP is clearly an indication of the level of frustration of the public with the corruption and mis-governance of the existing parties.

The coming to power of AAP, without a clear majority is interesting. BJP, the party with the most number of seats, is a sore loser and will be in the usual role of opposition. The Congress, with a handful of seats supports the AAP!! Interestingly, AAP is quite vocal against both Congress and BJP.

An interesting strategy from the Congress. Maybe they want to show how 'responsible' they are and how they are willing to listen to the people. In all probability, the Congress support may last till the outcome of the general elections. And if they do badly and BJP does well, they may continue the support. If they do better than is commonly expected, they could pull out.

BJP has ended up as the biggest loser in the Delhi game. First they wanted power. Upset at AAP being the reason for their not getting a clear majority in Delhi, they now look at AAP as a bigger enemy than Congress!!

For citizens across the country, AAP brings forth new hopes.

AAP, however, is perhaps surprised by its own success. A few slogans against corruption and the involvement of citizenry has left them without a proper workable manifesto. The manifesto they now have is quite lame- slashing power bill etc. They need to articulate some economics quite soon. And realise that governance is more important than merely talking about governance.

Everyone will be keenly watching this experiment. And has given a new hope to hardened sceptics like me, that we could have a government that does not include the congress and the BJP. Both parties are virtually the same, though the BJP states that the Congress had a longer tenure to ruin the nation.

Unfortunately, in the last five years, BJP has done absolutely nothing. Just boycotted parliament. Nothing remedial has been suggested. The campaign speeches of their leaders, including Mr Modi, have merely been anti-Congress, anti-dynasty lectures. Nothing about what they intend to do has been spelt out. And the infighting at the top is not over at all.

I write this, presuming that Aam Aadmi Party is accepting the proposal to rule Delhi.

The way AAP has gone about consulting people at this stage, perhaps is an indication that they will do so when it comes to any big issue. That is welcome and refreshing.

2014- Some thoughts on preserving money


2014 does not look very exciting, from an investment perspective. The focus of the world seems to be more on what is referred to as ‘tapering’ and what the implications are. In India, the tempo will build up to the coming general elections in the middle of the year. The global economy looks as shaky as before, except for the surge in liquidity everywhere.

2013 is ending with our stock market indices at near all time highs. However, the indices hide the fact that the markets have become extremely polarised. High quality has become unaffordable from an investment perspective and poor quality stocks are now catching up. The mid caps are still way behind their highs. Banks are sitting on record levels of doubtful credit and ways will be found to change the label.

PSU stocks seem to have found more scepticism as the government seems to be helplessly torn between populism and inactivity on the economic reform front.

Politics has become very predictable. Irrespective of what happens at the centre, there is unlikely to be any big change in the economic outlook or policies. If the UPA goes and NDA comes, we can expect no better. Every reform measure has been opposed by the NDA in the current term and should they come to power, do not expect anything different. It is only the ‘expectation’ of change that could provide some altitude to the markets.

As 2013 draws to an end, the inflation linked bonds are being launched. A welcome initiative, but with a lot of ifs and buts about the tax implications a full throated endorsement to invest is not possible. It may be good for those in the non tax-paying bracket. The moot point is whether they have money enough to invest. A small asset allocation to the bonds would be useful, should there be an undesirable coalition that will push inflation through the roof. Should a third front take charge at the centre, expect mayhem on the financial markets.

I would keep my liquidity intact. I do not see many great investment opportunities in equities at the present juncture. I would keep my eyes peeled for any event based price action that could bring some good stocks to a buying level. The stock markets did not do much, if we measure point to point. However, the volatility threw up a lot of opportunities. If one had discipline to have a laundry list of stocks to buy, at prices that provided some safety, 2013 provided many opportunities in quality stocks and some select mid caps.

Gold had a terrible year, though Indian investors were cushioned to a large extent by one of the sharpest annual depreciation in the rupee.

2014 is going to be interesting. The Chinese New Year in 2014 will herald the beginning of the “Year of the Horse”. The stock markets clearly personify that. We all know that one horse will win, but no one knows at the start about which one it is going to be. If we look at corporate earnings, the first two quarters of 2013-14 have been the worst in over a decade. One way to look at it is that things can only get better from here.

Foreign exchange earners are going to be the preferred choice for 2014. IT for sure looks good. Avoid the trap of falling in to commodity exporters or rice, jewellery etc. Capital goods are best avoided, though there could be a selling opportunity once the new government comes in to power. I clearly do not see government finances being able to afford populism and development expenditure out of its budget. Our fiscal position is not all that great and the impact of government freebies is going to be severe in the years to come.

Look for companies with no debt, steady domestic market and reasonably clean management. Do not increase allocation to equities or re balance etc simply because the year is changing. Asset allocation should also be a function of relative price to value of assets. Do not spend time worrying about ‘tapering’. It is more important to see whether the company we choose will make more money or less money and with what level of certainty.

Tuesday, December 10, 2013


Investing in equities has always been a matter of considerable debate. We look at the indices and draw quick conclusions. For instance, we saw the BSE Sensex at 20,000 in 2008 and in 2013 we are still there. So we conclude that equities did not give us returns. This happens to us because this is a measure from one fixed point in time to another. It also assumes that we simply put money in to equities in one go and wait. This means that we are being subjected to the vagaries of market timing. If we were great at market timing, we would have bought at 8,000 index and sold at 20,000. Alas, we are not blessed with this as foresight. It is only in hindsight that we can draw these conclusions.

There are two methods of investing that I like. One is to keep target prices for buying my stocks and buy when the stock hits that price. It may happen or it may not. Also, it is possible that the stock may still seek lower levels.

Given that markets keep fluctuating, the much talked about SIP or “Systemic Investment Plan” is probably a good way to invest in to the markets. Let me take two of the oldest equity schemes that I think are well run and see. One is Franklin Blue Chip Fund and the other is the HDFC Top 200.

Let me give below some numbers;

.......................... 1 year ..... 3 years ...... 5 years ....... 10 years ..........

Point to point return

HDFC Top 200 3.01......... 0.88 ......... 21.30 ........ 20.76 ...........

Franklin Blue Chip 3.14......... 2.74 ......... 20.53 ........ 18.68 ............

BSE Sensex 7.51 ........ 2.12 ......... 17.97 -------- 15.20 ............

(These are annualised returns, in percentages. I have taken 1st December 2003 as start date)

It does look like the last three years, we have not got much return and that both the funds could not match the index returns in the last one year. So, can we say that mutual fund investing is pointless or equity investing is not all that hot?

Now for the same periods, let us look at what SIP (monthly on the 1st of each month, we invest equal amounts) would have delivered:

SIP Returns

For the latest ----------- 1year ....... 3yrs --------- 5yrs --------- 10yrs ............

HDFC Top 200 13.34 ------- 7.28 --------- 10.78 --------- 15.74 ............

Franklin Blue Chip 14.16 ------- 8.63 --------- 11.55 --------- 14.27 ............

NIFTY ETF(Benchmark) 17.57 ------- 9.42 --------- 10.03 --------- 11.30 ............

(Annualised percentage returns for equal amount SIPs starting December 1st )

Does this not change the perspective radically? The main problem has been our paying too much attention to the noise and trying to put money in to the market when everyone is buying? We tend to just put money once or twice when the noise is the highest and then suffer because our timing was wrong?

Whilst this strategy cannot deliver big returns, it also prevents big losses. The important thing is to have the discipline to keep on going at it. Treat the SIP amount as expenditure rather than a decision point each time. And I would urge long time frames- ten years or longer. As I keep saying often, investing in equities should be with money that you do not need in a hurry.

Whilst opting for an SIP, I would prefer to keep away from thematic funds or sector funds. I would rather focus on diversified equities. There is also an option to pick on the Exchange Traded Funds on the Nifty or the BSE Sensex. The advantage of the ETF is the fact that it is an automated process and does not have a fund manager bias in stock picking. Also, as the size of each fund grows larger and larger, beating the index gets harder.

The other obvious advantage of the mutual fund return is the tax break on the returns. So whilst comparing it with bank deposits or fixed income, keep this in mind.

One interesting data thrown out from the table above is that the ETF in the Nifty ( the only index based ETF with a ten year history) seems to have done better in the recent period, besting the mutual funds in the three years and lesser time frame. Whilst it is too early to conclude, it could be because in the earlier days, it was easier to beat the index with a smaller corpus and now with the two funds having grown very large, the impact of small winners is not high. So, going forward, maybe the passive ETFs on the broad indices may be the best option.