Over last two years, we have seen many moods of Mr. Market. From gloom to doom to boom and back again. Overall, bears commanded tremendous control over bulls. It is only natural that investors are loosing hope and starting to move money elsewhere. Especially those investors who started during last bull run in 2016-18 time-frame. Seasoned investors however are doing the opposite, they keep on adding more money to make bumper profit when market rebounds. But the question is when will market rebound. The easy answer is soon but investors want to know how soon 🙂
To find a realistic & probably much accurate answer, we can analyse past patterns (historical data) followed by analysis of present situation. Combining these two we can try to estimate a probable future direction. Let’s look at historical data first.
Historical Data Analysis
BSE Small Cap Performance (2003-2019)
Index @ 1st Jan
Index @ 31 Dec
Based on above data, we can deduce following patterns:
On Friday, 20th Sep 19, Finance minister announced new array of measures to stimulate economy which is slowed down back to 2013-14 levels. This is second major announcement from finance ministry to put country back on growth path. First one was to inject ₹70,000 Cr in PSU Banks which was done in in Aug’19. With new announcement, finance minister Nirmala Sitharaman surprised everyone by cutting corporate tax from 30% to 22%. Many experts are saying this is the second biggest reform since 1992. Today’s AI post is a short note on the same. Let’s analyse its impact on the GDP. It will be a two point analysis where we will look into both positive and negative aspects with a conclusion.
Stock market which had seen a rampaging bull market during 2016-17 has seen significant correction starting 2018 and it continues relentlessly. Small cap index has been hammered down by around 40% from its peak in Jan 2018. While large cap has been relatively unscathed, everything else apart from top 50 stocks have fallen like a pack of cards. As per data, around 65% stocks have fallen more than 50% over last 18 months. Only less than 10% stocks have fallen less than 20%. This means majority of stocks irrespective of the industry, balance sheet health, growth rates, have fallen during this period. A question which is often asked in times like these “Are we at the bottom?” There is no easy answer to this question. It is all about probabilities. Still based on economic patterns, one can get a logical and rationale view on it. To reach there, we need to first understand the reasons behind this downfall.
The Rise of Stock Market: 2014- 2017
Below points contributed to the rise of stock market during the early days of the last bull cycle.
Brand New Government: In 2014 when new government came to power, people had put a lot of hopes and expected that Modi Government has a silver bullet to fix all problems. This fueled investor participation in stocks market.
Benign Valuations: During 2014, mid and small cap stocks were trading at a big gap when compared to large cap stocks. It was overdue for reversion to the mean.
Easy Money: Worldwide, central bankers were still printing free money which was largely lapped by big investment firms to deploy overseas emerging markets including India.
Favourable Oil & Gold Prices: 2014-15 was a period when oil prices crashed while gold prices also saw a mini revision downwards. This reduced gap for India’s fiscal deficit and allowed some room for new government to spend on infrastructure etc.
At the Peak: Sep’17-Jan’18
Super High Valuation: Three years of bull market had pushed market valuation at skyhigh. It was only a matter of time when it would normalize. However, such was the optimism that analysts started to value stocks with forward 2 to 3 years earnings estimates to justify valuations.
US Fed Signaled Rate Hike: During this time, US Fed announced that it is going to hike interest rates slowly to bring them back to normal levels of 2.5% from 0%. This was the first indication of a looming crash as foreign money inflow into the stock market was largely helped by cheaper interest rates.
Rise of Domestic Investors: By this time, we had significant money flowing into the stock market via SIPs. While FIIs were fleeing away after US Fed led rate hike started, domestic inflows kept market at elevated levels. However, with one of the driving force (FII) now dragging the market, it was only a matter of time when impact was to be seen.
Rise in oil prices: After hovering at $30-45 per barrel, oil also started to boil due to conflicts in middle-east, sanctions on Iran oil, etc.
Crash seems inevitable if we look back at above factors which were at play during Jan’18. Hide sight analysis is easier but also a great teacher. Economy was not moving at the pace predicted by the government & analysts. It was only a matter of time that domestic flow will crack, leading to downgrade of the market.
Downhill from the top: Jan’18 till present
Economy is still slumping: During past 18 months of market correction, the valuations have descended down to sane levels however it was now economy which played a spoilsport. With earnings falling down, the possibly benign valuations went up without any increase in stock price. Thus more correction follows.
Oil & Gold Price on elevated levels: Oil has stayed around $55-65 per barrel and refuses to come down as OPEC cartel have learned their lessons in 2014. This put limitations on government spending power as it has to first fix the gap in fiscal deficit.
Fed rate hike has peaked: The current interest rate at 2.25% seems to have peaked and it is making dollar costly, resulting in FIIs continuing to exit emerging markets like India.
Government Decisions: Government has decided to impose new taxes on super rich and FPIs. These decisions on an already slowing down economy is only going to hammer down the market. While tax collection is not a bad thing but it has to be be introduced gradually by consulting impacted parties. Most of the decisions of the government has been down in isolation, leading to sudden chaos in the market. One prime example is the long term taxation on equities which woke up the bears.
PSU Bank & NBFC crisis: Just when India needed liquidity to expand businesses and economy, there were two interruptions to liquidity. One during demonetization which crippled growth for a year. Another one came exactly after an year, the default of IL&FS & NBFCs. PSU Banks who serve majority of the banking requirements in India is cash strapped due to high NPAs. So overall even if economy could have possibly grew this stage, there was no fuel for growth.
Trade War: Another global factor hindering economic growth globally is the US-China trade war perpetuated by Donald Trump administration. This is hurting both economies in general while certainly few US based businesses will be enjoying it since they are getting US market share back from China. Overall, people of United State will likely suffer in near term as there will be a slowdown amidst costlier products, produced locally in US.
Promoter of a company plays a huge role in ensuring company’s success in the future. After all, promoter is like a jockey who carefully navigates company on narrow bends and accelerates on straight paths. It is therefore very crucial to have great brains behind a business. This is more important for smaller companies where promoter’s vision can help leapfrog the company into bigger leagues. Today on AI Post, we will be taking example of Wipro and its maverick chairman, Azim Premji. In a recent announcement made by Wipro, Azim Premji will retire upon completion of his current term ending June’19. Going forward, his son Rishad Premji will be taking over the reins of India’s fourth largest IT company. We will also discuss on how a villager made tons of money by investing in Wipro almost by a chance. Let’s dig deeper.
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In today’s article on AI Post, we will cover the evolution of startup industry in India and its impact on the economy. We will start our discuss from the origins of the startup culture in India and which way it is likely headed. For simple illustrations which everyone can understand, we will be taking examples of Uber, Ola and Flipkart. Same trend is getting replicated in other startups as well. A good Sunday read, which may take approximately 8-10 minutes to finish.
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It seems exit polls have evolved. This time all of them unanimously gave same verdict which later translated into more or less the same result. Thanks to the power of social media, this time people were pretty decisive and vocal on pro-modi or against modi. With elections over, friends will not be fighting over political issues anymore.
Talking about stock market, people have a lot of expectations from Modi Government. In general, investors are upbeat on the election result and expecting a start of bull run from here onwards. In this article, we analyse and put forward our views on what lies ahead for stock market and certain industries under Modi 2.0. We will also discuss on BJP’s election manifesto to get a sneak preview of future policy direction.
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Today’s article on AI Post is focusing on a niche segment of stocks within stock market. These are stocks listed on special platform of stock exchanges called as BSE-SME & NSE Emerge. The purpose of such platform is to enable entrepreneurs and small companies to raise capital from stock market and fund their next leg of growth. You will be surprised to know that this segment of stocks have given stunning results to investors. Over last three years, BSE SME IPO index itself has given an annualized return of 31% as compared to BSE Sensex’s 16%. Almost double.
BSE SME IPO
Going down to individual stock level within SME space, we have many multibaggers even in a bad year like 2018. Within 2018, stocks like Mittal Lifestyle gave 478%, Mac hotels gave 283% & Gautam Gems returned 247% just to name a few. If we extend our horizon up to 5 years time-frame, we have more than 25 multibagger stocks emerging from this segment. Now consider this – Till 2017, there were hardly 100 odd stocks listed on BSE SME platform. This implies a very high strike-rate of finding a multibagger from this segment. Theorically, 1 out of 4. Since 2014, Suyog Telematics gave 1700%, Kushal Tradelink gave 1740% & SRG Housing Finance 1553% returns to quote a few. All of them have now graduated to the main platform of BSE & NSE. With this migration, liquidity has improved and certain restrictions on their trade has gone away. We will cover all of this at a later stage in the article.
Coming back to the article’s heading, so there is a serious amount of money to be made from SME platform that is for sure. Surprisingly, we have not heard much about them in media reports. Possible reason is because there are very limited set of investors interested in SME stocks. Media mostly reports to the interests of general investors and not to the taste of specific set of investors. This can also be a reason that there is hardly any stock advisory service catering to this segment. Market supplies services which is in high demand. This concept is also very new to Indian investors while it is quite popular abroad. This means early movers will get the advantage.
At AI, we have observed this gap and that is why we are publishing about them so our ace readers are aware of this relatively new concept in equities. SME stocks are open to everyone and there is no reason why it should remain confined to a limited set of investors. May be lack of awareness & expertise is restricting wide participation in SMEs. There is no denying that it is highly rewarding but also a very risky segment to operate. Sensing this, we are launching a new stock advisory service, called asEmerging CAPS to fill this gap and enable small cap enthusiasts to benefit from these new opportunities. Ok, enough introduction. Let’s go into the details of SME stocks and how to deal with them.
It been tough for equity investors. Market has tanked. Impact is more aggravated at individual stock levels. This is in sharp contrast to 2016 or 2017, where money was easily made over free sms tips or television news channels. Unfortunately, this is the true face of stock market which will keep on popping up at regular intervals. You need a strategy to tackle it otherwise all your gains made during bull years will vanish in thin air. If you don’t have enough time or expertise, it is a wise decision to buy a professional subscription.
Once you decide to approach a professional help, the issue arises in choosing the right stock advisor. If you search on google, you will find tons of websites claiming to be the number one. This further adds confusion. In this article, we discuss a checklist which should be considered before buying subscription of a stock advisory service.
“Money is sowed during bear phase and harvested during bull phase”
Ongoing correction has opened up rare opportunities for wealth creation by 2022. We invite you to join our premier wealth creation service by clicking here.
Today in AI post, we want to share our honest & candid discussion with a senior investment banker based in Mumbai. I know him since school days and is one of my good friends. He started his career in sales, later got promoted to wealth manager. A career spanning more than two decades in which he worked in both Indian and MNC financial institutions. So, he has seen working style of different institutions across various levels.
Over last weeks, we met a few times and during the course of our multiple free-flowing discussions, we discussed about various practices in Indian banking industry. Our banking industry is greedy which is a known fact. There are a lot of malpractices but the extent or breadth of it is rather discomforting. I want to share this information with our ace readers so at least you are aware of it. With my friend’s permission, below are the excerpts from our conversation which can be very insightful for innocent investors. For privacy reasons, I will refer him as Mr Banker in this article.
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5G is a much talked about upcoming technology. At Ace Equity Investor, we continue to bring you the latest industry trends via free for life newsletter service, AI Post. A few weeks back, we wrote a primer article on 5G in which we familiarized you with what and how of 5G in a simple language. Before you continue on today’s article, it is recommended to go through our earlier post by clicking here.
5G will change the way we communicate with technology and it will usher in many new business applications. Needless to say, this will have a profound impact on our day to day life. 5G is not just one network but a network of networks. In today’s article, we will explore various scenarios where 5G can benefit human beings. These scenarios are being explored at various places across the world by technology companies (like AT&T, Docomo, Qualcomm, etc). We skimmed through various research reports from Siemens, PWC, Huawei, Accenture, etc & white papers from Mobile Congress, 5GPP Europe, TechUK, Research Gate, etc to understand and summarize probable impact on sectors & stocks in Indian context. Some of the illustrations have been borrowed from them to simplify the context.
Please be patient as it is going to be a bit lengthy article but it will not bore you as the language is kept simple. Let’s find out more details about it.
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So far in 2018, AI Post published a total of 43 articles with two more articles to go. As we draw curtains to year 2018 and get ready to welcome 2019, it is time to reflect back on the success and failure of the last year. We covered wide variety of topics ranging from stock market to technology trends to investor behavior & current affairs. We hope you enjoyed reading these articles and it helped you to gain some confidence in equities.
Today on AI post, our editor is handpicking six top articles from AI post which we think were pretty good and full of common sense. Here are these six posts.
Investors are spooked by the uncertainty arising from various state elections and general elections in next five months. There is a common belief that if ruling party comes to power it will be good for the stock market. Any adverse result may put stock market into the tailspin. In today’s post, we are trying to analyse from two angles, one from what historic data tells us starting from 1980s and another from what common sense tells us. Let’s find more details about it.
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Technology has time and again created many disruptive patterns in the economy. For people who identified and saw it coming, were able to benefit from it. If we just go back a decade, things were very different from today. One such disruption was roll out of 4G which helped emergence of various new businesses like Uber, Ola, Food Panda, Flipkart & Airbnb. These new generation companies are wiping out old business models like Meru Cab, Local Taxi Agency, Grocery stores and what not. People and businesses which saw them coming either refused to believe and got out of business, the smarter one realigned themselves with new business models to sustain in new & dynamic marketplace. All powered by speed of internet which is connecting customers & suppliers at lightening speed.
Technology however, keeps moving forward and this time disruption has found a new name called 5G. It is not just a faster version of 4G, in fact faster internet speed is only one aspect of it. The aim of 5G is to galvanize whole device ecosystem in an interconnected mesh of devices called IoT (Internet of Things). This will have very profound impact on the way market place is running. It will become a network of networks. We will surely look back after a decade and might say that things have changed so much from 2018.
Since 5G is a big topic and we want to write a comprehensive post covering major aspects that investors need to know, we will be publishing it as a two part series. Today, we will discuss about the features & layout of a 5G system, pros and cons of this technology and latest updates happening in 5G around the world. As usual, we will keep the language simple to understand so that you can easily understand the concepts. One does not need to be a communication engineer to understand 5G. However, this article is written by a communication engineer turned stock market analyst 🙂
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Ever wondered why many famous companies never really generate returns for the shareholders. There are plenty of examples like GMR or Jet Airways. Both belong to India’s rising aviation industry. GMR owns IPL cricket team Delhi DareDevils, it also built Delhi airport. At a high level, it seems GMR should have been a great wealth creator but that is not the case. Same goes for Jet Airways, it has been in aviation industry since 1995 and once it was India’s best private airlines. In the same period, India’s air traffic has grown by leaps & bounds. Starting from just 16 million passengers two decades ago, it has grown 8 times by now & expected to grow another 3-4 times in next two decades. Still Jet Airways continue to struggle for survival.
Same is true for Apollo or Fortis Hospitals. They operate in India’s ever growing healthcare sector. All of us must have queued in OPD of these hospitals at some point in time, depicting healthy demand. Alas, they have also not created healthy returns for shareholders. Same is true for Airtel or Vodafone. This can be perplexing as in why these companies operating in forefront sectors have not grown at all.
The answer lies in the way these businesses are operated. In his 1992 & 2007 annual letters, Warren Buffet spoke about it and he classified three types of businesses. The great, the good & the gruesome. He advised investors to stay away from gruesome and stick to the great & good businesses only. The question is how to identify which business is great & which is not. Today in AI post, we are discussing these three types of business models which can cover almost every type of business. You can apply it to instantly assess the quality of underlying business of a stock.
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This concept was originally published as part of our Tiny CAPS report on 18 Nov’18. To suit AI post, certain portions have been modified for easy understanding.
Today’s AI post focuses on the behavioral aspect of investment. Emotions play a far larger role in wealth creation than any high end analytical or robotic capabilities. In equity, your EQ (Emotional Quotient) matter more than your IQ (Intelligence quotient). There is a famous saying from Warren Buffet that “Buy when there is blood on wall street and sell when there is euphoria”. I know you have read it several times all over the internet but are we able to implement it when time is right? Currently, there is blood on at least dalal street which means we should be buying Indian stocks right now but how many of us have that courage to do it?
If this question was asked last year, I am sure many would have said, “Surely, I can implement what Mr Buffet is saying during next stock correction”. Knowing the path is one thing, walking down that path is another. Do you know why this happens? Fear, of course is one short answer but we are looking in-depth here. What induces this fear? How come last year’s confident & aggressive investor has transformed into unsure & risk-averse investor. This is what we are trying to answer in today’s AI Post. We have coined this phenomenon into a term “Bear Market Brainwash”. Let’s read about it.
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As a regular reader of AI Post, we aim to keep you abreast with the latest developments across the financial world. Keeping up the ante, today we have Damien Kopp on AI post. Damien is based in Singapore, working as product head with a fintech organization. He is also board member of a Non profit organization – Live with AI. Fintech space is rapidly evolving. Over next few years, it will have a very profound impact on the way we do banking transactions. In India, we have seen emergence of digital payment solutions from Paytm to UPI to WhatsApp. In this article, we try to understand how fintech is shaping or rather re-shaping robo-advisory with the help of augmented intelligence.
During our conversation with clients, we were surprised to learn that most of them had no clue about FIFO (First In First Out) rule which is applicable on all demat accounts as per IT Ruling Section 25(2A). If you are looking for selling some portion of your shares (lets say 100 out of 200 shares) then FIFO rule can impact your average purchase price for remaining shares. Let’s try to understand where it applies and how it can be used to our advantage as well.