Outlook 2024

Summary of 2023

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In 2023, equity investments demonstrated excellent performance, with the benchmark index Nifty providing nearly 20% returns, followed by Nifty Next Fifty and Nifty 500, delivering returns of close to 25%. Midcap and small cap gained over 40% in calendar year 2023. The benchmark index Nifty is the top performing index in the last 3 years and the 5th best performing index in the world in 2023 after Nasdaq, Nikkei 225, Taiwan and S&P 500.

Within the Nifty500, which represents a broad market index covering 93% of the total market capitalization of Indian equities, about 40% of the companies underperformed the indices and 60% of the companies did not outperform the midcaps, while the Nifty500 constituents Includes all midcaps. Around 50 companies delivered over 100% returns in 2023, of which 4 are part of my managed portfolio, including BSE Ltd, which is the top performer of 2023. Of the 34 companies I have invested in, one company is still trading below the invested value and 5 companies are giving returns below the benchmark index. My cumulative return for 2023 is 58.04%.

Compared to the pre-Covid era, the average CAGR growth of the last 4 years is around 15%, supressing the long-term growth of the last 10 years which is around 13% and the average CAGR growth of the last 15 years at 9%.

India G-Sec curve inverted in February 2023 for the first time since mid-2013 and the first time it still remains so for such a long period.

The Indian currency performed well, making it the second least volatile currency in Asia in 2023 after the Hong Kong dollar.

Outlook for 2024

?In 2024, general election are scheduled for nearly a third of the world's population, including India and the United States. Along with India, general elections are also to be held in Pakistan and Bangladesh in the South Asia region in the first half of 2024.

The newly elected government is expected to boldly present a long-term development plan and focus on some specific sectors to find ways to accelerate growth with ample time to revive the economy which the current government could not do in the last 5 years because marked by this most challenging period in last 100 years, including the Covid pandemic in the first 2 years and then the inflation crisis. The newly elected government will definitely take some bold decisions to bring the economy back on track, which may hurt market sentiments for some time. It is clearly visible that the focus of the next government will be on specific spending to improve asset quality.

I anticipate that auto and auto ancillary companies will take the spotlight, contributing significantly to accelerating the economy on a large scale. The new power policy in 2021 is a game-changer, actively promoting and supporting power companies, and this momentum may persist after some consolidation. Banks or NBFCs, being integral to the economy, may face pressure during reforms. Major technology companies aiding the manufacturing or service sector with innovative ideas might lead the next rally. The growth of the infrastructure sector will primarily hinge on the private sector, given the newly elected government's primary task of controlling the fiscal deficit without increasing the tax burden.

Reflecting on the COVID period of 2020, nearly all countries implemented strict lockdowns to save lives and prepare to combat the COVID-19 virus. Economic activities came to a halt, except for emergency services. Central banks globally opened their treasuries to support the economy, resulting in excess liquidity and investments outperforming expectations. However, post-normalcy, inflation began rising in mid-2021, escalating rapidly in 2022. This triggered central banks to implement damage control measures, sharply increasing interest rates throughout 2022 and 2023. The US Fed even announced Quantitative Tightening (QT) of $90 billion per month to absorb liquidity. After 18 months of QT and a rapid rise in the interest rate cycle, inflation is now on a downward path, creating a new crisis.

Challenges arise as livelihood costs not accrued during the pandemic and welfare expenditure not yet indexed pose risks to the market, particularly in low-income countries. Central banks, including the US Fed and RBI, have started streamlining the additional liquidity provided during the pandemic. European central banks, planning to start QT in 2024, contribute to this trend. Some countries' central governments are concealing welfare expenditure during the COVID pandemic, and the newly elected government is expected to address these irregularities systematically, given the time at their disposal.

A rare occurrence is observed where, under QT, bond yields are falling. This aligns with our estimate that 2024 will be a depression year. However, volatility due to geopolitical events may be higher than in the last two years. While some nations may attempt to create artificial demand by disrupting world peace, as seen in 2022 or 2023, I believe their impact will be limited. The probability of large-scale conflict is very low, though not zero, as history supports this theory. If such conflict occurs, it could indeed support the world economy and help absorb excess liquidity rapidly.

I presume that 2024 will be a consolidation year for investors. It presents an opportunity to accumulate good investments at fair prices or reshuffle investments towards next-generation companies, paving the way for the next golden period in the investment era. This year offers bargaining options for obtaining higher returns on proposed investments.

Investment philosophy

In my understanding, the world economy relies on the flow of money and its circulation based on income received. This represents a fundamental principle of modern economics. However, some find this statement contradictory because the real yield (dividend) of equity investment is often lower than that of fixed income instruments, even though the returns from equity investment surpass those of any other asset class. Before the 1990s, the dividend yield of the benchmark index Sensex exceeded 10%. This figure declined to 3% at its peak in January 2008, subsequently dropping to around 6% at the Sensex's low in the same year. Since then, it has steadily decreased, currently standing at approximately 1.25%, considerably lower than deposit rates. I do not believe that people or investors consider unrealized gains of equity (the increasing value of equity investments) as returns or profits since they can only enjoy them after liquidation. There is no logic in liquidating assets because no one can remain rich solely through asset liquidation.

So, why do intelligent individuals opt for equity investments to accumulate wealth?

The logic is straightforward: they consider future dividends on current investments, which is unparalleled compared to any other asset class. In fixed income instruments, the dividend yield tends to be stable or downward-sloping, whereas in equities, it tends to increase. For instance, if the same amount is invested for the same period, fixed income instrument maturity income is defined and fixed. In contrast, equity investment maturity income depends on the performance of the company. For example, let's consider XYZ company with a current stock price of $100 and a dividend yield of 2%. If the company grows with a 10% CAGR for 10 years, the share price would be around $260, yielding approximately $5.2 at the same dividend yield. This is equivalent to a 5.2% yield on the original investment, a privilege not available with fixed income instruments.

My investment philosophy revolves around focusing on the income from equity investments along with the growing value of the investment. I aim to ensure at least a 25% dividend on the invested value after 10 years. This philosophy shields me from short-term volatility, providing the opportunity to achieve higher yields in depression years. My primary focus is on real income rather than fluctuations in share prices, as I firmly believe that such fluctuations have no impact on the day-to-day activity or productivity of a company.

Investment strategy

1)??? Identification of Investments: - I strongly believe that fluctuations in shareholding patterns start much earlier than good or bad news becomes public. Hence, tracking shareholding patterns is crucial for identifying new investment ideas or manage existing investments.

2)??? Fundamental analysis: - After filtering shareholding patterns to identify new investment ideas, the company's fundamental stability such as cash flow, margins, growth or capex is examined.

3)??? Understanding of Business Model and future growth: - Once the new idea passes the initial parameters of the fundamentals, further analysis takes place to understand the business model and identify potential future growth of the company.

4)??? Risk analysis: - Once the business model and future growth projections align with our investment philosophy, I analyze the regulatory benefits or drawbacks to the company and then assess the worst-case risk of the identified idea.

5)??? Investment management: - Once I am confident to invest, I take the initial position and follow the points given above on a weekly, monthly or quarterly basis. Increase or reduction in investment depends on the performance of the company.