The new year note and current view on the market sent to our subscribers.
Aurum Capital New Year note: Jan 2020
Market View and Analysis:
We are going through a tough time in the economy, and outside of a handful of stocks, in equity markets too. The index is just not giving the true picture of the markets. This kind of polarization has not been seen in the Indian markets. If we categorize the stocks by market capitalization, in the last 2 years, only the first 20 stocks as a group have given positive returns. Rest all the stocks have given negative returns. As we go down beyond 500 stocks, the return of the rest of the stocks is -53%. This covers almost 90% of the number of listed stocks. Another study shows that “A” group shares command 94% of the market capitalization of the Indian markets and the rest including “B” group and others command a mere 6% of the market capitalization. This is extreme polarization and again has never been witnessed in the past.
The Indian markets and economy had a big slowdown and that does affect the broader markets. The reasons are many. We do have a global slowdown, and the Indian economy is formalizing, so it will also have cyclical upturns and downturns. Whenever there is a slowdown, there is a flight to safety, and we are seeing this. Making “quality names” very expensive. As investors in equity, we have no option but to tide out these times, stay invested in the companies where we have our conviction.
The silver lining is that in the last few days broader markets have started to outperform. We expect this to continue. Valuations are favourable in this space. It’s time to reap the seeds of our patience.
We believe the worst of the slowdown in the economy is over. The reason, we think this can happen is
- Monsoon effect: We have had a good monsoon, albeit a delayed one. The effect of good monsoon should start playing out now. Agriculture is a big part of the economy. We see some uptick in rural spend. Due to delayed monsoon, many industries like mining, cement had an extended downturn. Electricity demand was also down due to this, apart from the general slowdown. These should move up. Auto demand should also pick up and we are already seeing some green shoots.
- Policy steps: The government has woken up, albeit in a delayed manner, to the problem in the economy. And have taken a number of steps, the biggest being corporate tax cut. And we are hearing that there can be changes in income tax slabs, putting more money in the hands of taxpayers. These can help in reviving demand.
- Transmission of interest rate cuts: We have still been able to transmit only 30% of the interest cuts. We think as liquidity increases and NBFC crisis gets resolved, further transmission of interest rate cuts can be seen in the next 6 months
We have been invested majorly in the small and midcap universe. As you would recall, we have been extremely cautious with our investments. We remained conservative to the extent that till today we are invested only 70%. We remained very conservative during 2018 as well and invested only 32% at the end of 2018. We were criticised and questioned too for this extreme cautious approach. But in hindsight, we know that it helped us in controlling the damage.
Our performance measurement criterion remains conservative and does not consider any returns from liquid/debt funds for the un-invested money. However, we include any loss booked in any of our investments.
We have to understand that returns are also cyclical and follow market cycles. The segment we are in has had a tough 2 years. We believe this is likely to change. Most of the companies we have invested in have value, and it’s a question of time when this value will be realized. We are constantly reviewing each company we are invested in. We just have to ingrain the trait of “PATIENCE”, and we are confident that we will be rewarded in the due course of time.
We have given a limited-period offer of a 20% discount. We thank you for the overwhelming response to renewals. The members, who have not renewed may avail of this.
We are thankful to each one of you for your continued support and confidence in us.
We will end this message with a quote.
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” – Peter Lynch
We wish you all a happy new year.
SEBI registration No: INA000011024