Investing for the New Year 2017

Successful investment requires clear thinking, consistent action and sufficient patience. If we make those ours, 2017 can definitely yield a rich harvest, writes Tensing Rodrigues

 Every year is a new year, and holds a promise of something new; however as the world sails through a rough patch, it is easy to lose hope. US has just passed an election; and what an election? Trump is still an unpredictable unknown. China had grown at an average rate of 9.8 % over the last 35 years since it veered to a market economy; now the rate has ducked to 7.3 %, with no assurance of a bounce back.

Europe has been hit by a tsunami since the Brexit vote happened; it is a true identity crisis in the midst of an economic slowdown. Brazil’s long scuffle with political demons has taken a toll on its economy; and sanctions have played truant with Russia’s growth fuelled by oil.

Stagnant commodity prices have in general ruined many primary producers across the globe, taking steam out of the Emerging Market momentum. A shade brighter than the rest, demonetisation has proved to be a setback, albeit temporary, to Indian economy.

But, as Marion Zimmer Bradley, the author of The Fall of Atlantis puts it, the road that is built in hope is more pleasant to travel than the road built in despair, even though they both lead to the same destination. So let us not despair.

Recently Franklin Templeton Investments released its 2017 Global Investment Outlook; and surprisingly it is pretty hope filled. The key carry home of its Equity CIO is an interesting proposition: “a stronger United States economy offers a positive dynamic for many other economies and markets, allowing for a potential shift in equity market leadership from the US to other parts of the world.”

So Perks is doubly positive: on a stronger US economy and on the capabilities of some other economies to capitalise on it, largely the emerging economies. Though he calls this ‘out-of-sync global growth’, he sees a lot of potential in this unusual dynamic. Perhaps, in a world ridden with unpredictability, future can emerge only out of the unexpected.

In a very similar logic Justin Yifu Lin, professor at Peking University’s National School of Development, sees that hope in China meeting its full potential. What he means is that if it can clock roughly 7.5 % growth for at least the next decade, it can help the global markets tide over the rough patch. But, as he himself admits, achieving it depends on domestic conditions and the international environment.

One fact that should cheer an investor in Indian stocks is the relative stability of Indian economy. Momentary hiccups will always be there. But in the long haul, we can expect to trundle along at an elephant’s pace. We also do not have to have nightmares of commodity crashes; we live from hand to mouth, and to that extent are independent of external shocks.

What he implies by ‘domestic conditions’ is fast forwarding its reforms program and eliminating the economic distortions like bottlenecks in the financial market, removing the Hukou  system (household registration), which retards labour mobility and building a better social safety net. Can China rise to this challenge? That is the million Yuan question.

Mark Mobius, the legendary Emerging Markets guru from Franklin Templeton, is bullish about earnings outlook for EM equities. He still sees hope in Russia and China reversing their downward trend; so too China. But Mobius’ optimism for emerging economies arises more out of the catching up that they need to do – for instance in per capita income; but do they have the wind in their sails for that ? Mobius believes that they do.

He points to the fact that the manufacturing economies among them are slowly but surely regaining a current account surplus position, while most of the commodity-exporting countries have managed to bring down their deficits.  What reinforces such an optimism is the fact that the debt-to-GDP ratios of these economies are generally below those of their developed counterparts, providing a more stable and sustainable economic foundation.

But what does all this mean to an aam equity investor in India? It simply means that he/she need not despair. Well, 2017 may be worse for investments than 2016 was; it could very much be. But then an ordinary equity investor does not look over a year’s horizon. Yes, his/her stocks have been in dumps for the last 5 years or so; in the sense that there has not been an exciting bull run. But not exactly.

The top 10 large cap funds have returned about 15% on an average and the bottom 10 have clocked around 7.5% during this period; the top 10 mid cap funds have returned about 25% on an average and the top 10 small cap funds have returned about 27%, (valueresearchonline.com) I suppose this is a good enough performance; definitely not a reason to despair.

Perhaps what we have been missing is the kick! Going ahead, I do not feel we should look for spectacular returns; we are already past that phase; what the economy can deliver going ahead is a steady performance. Also the days of magic by stock wizards like Harshad Mehta and Ketan Parekh are by and large over; now the markets are far better regulated. So let us be satisfied with the 15%-20% at best; anything above the inflation rate is wealth creating.

One fact that should cheer an investor in Indian stocks is the relative stability of Indian economy. Momentary hiccups will always be there. But in the long haul, we can expect to trundle along at an elephant’s pace. Cataclysmic political upheavals are not ours to worry about; Indian democracy does not definitely work by the text book, but it is functional and effective; it can at least let out sufficient steam to avoid a coup. We also do not have to have nightmares of commodity crashes; we live from hand to mouth, and to that extent are independent of external shocks.

We are yet closer to the ground – we cannot boast of a once upon a time performance of Germany, US, Japan or China; so any fall does not hurt much.

And we still have large parts of the economy that have seen hardly any growth; so possibilities are vast.  What we need is a positive attitude, a habit of seeing things as they are, rather than as they appear through politically coloured glasses; un-pragmatic politics has been our bane since the independence. No, I am not talking about the politicians; I am talking about the aam investor. Success has never been favourable to hypocrites.

Successful investment requires clear thinking, consistent action and sufficient patience. If we make those ours, 2017 can definitely yield a rich harvest.

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