Dear Investors,
The following chart depicts our returns viz BSE 500 TRI.
The markets have done very well in YTDFY24 delivering positive returns consecutively every month over April-August 2023 before undergoing a minor correction last month. A question bothering everyone, especially prospective new clients, is whether it is a good time to invest or to hold given the current peak of the market. Our response to this investor concern has always been that it is impossible to time the market so efficiently that one is able to enjoy upsides without having to bear the pain of any downside.
Investors who have been with us since Jan 2022 would have experienced that their returns over Jan2022-Mar2023 were meagre, in line with the consolidation phase that Indian equities underwent. However, if they would have exited during this phase of consolidation, they would have never been able to benefit from the sharp upside Indian equities have delivered since April 2023.
Fundamentally nothing major has changed in the global or Indian macro situation or corporate performance to warrant the sharp run up we have seen in H1FY24. The Russia-Ukraine war continues, and global inflation has not been tamed with chances of further rate hike by US Fed while RBI continues to keep rates high. There are some long-term macro positives for India like bank balance sheets at their healthiest in over a decade, strong growth in tax collections, continued govt. focus on infra building and early signs of pick up in Indian private sector capex. On the other hand, some macros have also turned negative like increased probabilities of recession in US and Europe, cut back in global IT spends and falling Indian exports for the past few months.
However, anyone who even slightly tracks the Indian equity market would have observed that the narrative has changed completely in the last 6 months from caution to over optimism. Suddenly, India has become the hottest investment destination because of its favourable demographics, long runway for high growth, etc. These factors were very much in place in CY22 when Indian equities went nowhere. So, the key point we want to highlight is that it is impossible to gauge when or why the market narrative will change and time it. One must be invested in the market to enjoy healthy long-term returns. If one cannot bear the pain of short-term corrections in equities, then they also don’t deserve its long-term compounding benefits.
Another thing we consistently communicate with investors is to only invest in equities for the long term. The starting investing valuations become more and more irrelevant as one’s investment horizon becomes longer. Most investors would have seen the chart below for US equity returns:
Apart from the above chart, leading Indian discount broker Zerodha also shared the following insight about last 10-year returns delivered by listed Indian equites:
As can be seen from the chart above, there is a 71% chance of earning higher than 7% return CAGR (which is the typical Indian FD return) if one just remains invested in Indian equities for 10 years. Also, there is a 50% chance of earning 15% or higher return CAGR if one remains invested for 10 years. So, if one has some decent stock selection capabilities, one can easily earn a return of 15% or higher given he/she is a patient long-term investor.
Moreover, active investing or stock selection has worked the best in India. In an earlier investor update, we highlighted this and discussed the reason for the same. A Goldman Sachs study looked at rolling 5 year returns of stocks in 10 major markets since 2000: India, Korea, Brazil, South Africa, China, and Taiwan among emerging markets; and the U.S., Japan, Europe, and Australia among developed markets. The study concluded that India has produced the highest %age of multibaggers (stocks that returned 10x or higher over any 5-year period):
Despite this overwhelming evidence in favour of investing in Indian equities, why is that most investors have a poor experience of equity investing. Typically, investors end up earning much inferior returns compared to those of the indices or mutual funds. The key reason for this underperformance is that most Indian investors are not patient enough to remain invested for long periods of 10 years or higher. In fact, most make the worst possible mistake of exiting equity investments during periods of correction thus permanently booking losses. The chart below shows the short-term orientation of most equity MF investors:
To summarise, our advice to any prospective / existing investors worried about the current peak of the market is to have a long-term orientation and initiate or remain invested. We again reiterate that it is impossible to time the market so there is no way anyone can know when the right opportunity to enter / re-enter equity markets will present itself. We agree that current equity valuations are expensive, and most stocks are overpriced. However, we believe the answer to that is not to stay away but following the below approach:
Not to overpay and remain conservative about valuation. If we don’t find businesses at attractive valuation, we are happy to remain in cash.
Identifying sectors or businesses that are still trading at attractive valuation. There are always some businesses / sectors that are out of favour in markets but have good prospects.
Exit current positions that have become too expensive. Thankfully, most of our investments are still not expensive but we have started exiting a few that are in a phased manner.
The past 6 months have been easy for fund managers like us due to the broad-based rally in Indian equities especially small and mid-cap companies. The next 1 year or so will be much more difficult and will test the quality of any strategy. We hope to do our best by sticking to our philosophy of investing in quality businesses run by honest and competent management at attractive valuations.