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Samir Arora – How Long is the ‘Long-Term’?

Investment Outlook , Published Feb 17, 2019

Samir Arora

Samir Arora

Founder and Fund Manager at Helios Capital
Management Pte. Ltd and Advisor to SHINE Strategy*.

Equity returns on an average are generally good,
although they do not come evenly.

Overview

In 2019, both FIIs and domestic investors
would be buying, with the background of
low oil prices, improved earnings and
lower interest rates. Foreign inflows will be
better with rupee weakness unlikely to
pose a problem again in 2019.

It is easy to talk about the future of equity
markets and expected returns, if one can
use the words “in the long term” somewhere
in the prediction. Elroy Dimson, Paul
Marsh and Mike Stanton did a seminal
study of 101 years of global investment
returns a few years ago, analysing the
returns in 16 countries, and concluded that
the equity risk premium is on an average
approximately 5% p.a. across time and
countries.

Simplistically, this means that on an average,
investors earned 5% p.a. higher
returns from their investments in equities
relative to their investments in government
bills/bonds of the same country “in the
long term”.

In 2018, foreign investors
were selling stocks
and domestic investors
were buying it.

If you buy into the argument that equities
outperform alternative asset classes in the
long term (and in fact, have done so in the
past, including for countries that lost the
World Wars and for investors who had
invested before the wars had even started),
80% of the job is done. Believing in equities
leads to the following actionable steps:

  • Not to sell out of the equity asset class
    after a correction or in a panic that stocks
    may not recover, since history clearly suggests
    markets do recover
  • If point to point returns in equity are high,
    simple arithmetic shows that returns will be
    higher when one averages at low points in
    the market

It may be interesting to note that over the
past 20 years, Nifty returns have been
higher than the returns from investing with
Warren Buffett (via Berkshire Hathaway)
(and yes in US$ terms). The Nifty is up
12.73% p.a. in USD terms and 15.55% in
INR versus Berkshire (BRK/A) up 8.15%
during the period Nov 30, 1998 to Nov 30,
2018. (Source: Bloomberg).

For overseas investors, sustained INR
depreciation is an additional irritant. However,
we’d note that in the past 13 years,
there have been three episodes where the
the INR steeply bounded southwards within
a calendar year.

*SHINE is a mandate run on the Sanctum PMS platform
focusing on the theme of financialisation and formalisation
in the Indian economy.

During 2008, 2011 and 2013, INR fell
18.9%, 15.9% and 11.5% respectively,
against the US$ (and 9.2% to date in 2018).
In the balance nine years since 2005, INR
cumulatively lost a mere 5.9% against the
US$. Incidentally, immediately following
2008, 2011 and 2013, the Indian markets
rose 77.9%, 29.9% and 33.5% in the following
calendar years.

In 2018, foreign investors were selling
stocks and domestic investors were buying
it. History again comes to our rescue,
noting that FI investors invariably return to
our markets, and periods of heavy FII selling
are precursors to good years in equities.
This is likely to remain the case given the
background of low oil prices, improved
earnings and lower interest rates.

With earning shocks due to demonetisation
and GST out of the way, a new credit and
earnings cycle will start soon. With low
food prices (due to weak rural demand, low
global food prices and excess supply), low
oil prices, and technological deflation,
headline inflation should remain comfortably
low for some time.

forever-appreciating

With earning shocks due to
demonetisation and GST out
of the way, a new credit and
earnings cycle will start soon.

The crisis in the NBFC industry seems to
have been largely averted and these companies
should limp back to normal by the
end of this quarter. The larger issues around
governance and regulatory oversight
remain and the trajectory of growth is likely
to be lower in the near term due to higher
cost of capital, and markets rewarding cautious/
disciplined behaviour rather than
vanilla high growth.

With the NPA issue having peaked a few
quarters ago, the overall stress on the financial
sector has reduced significantly and an
important market segment (i.e. corporate
banks) should also yield better results going
forward.

Political uncertainty related to national election
outcomes in May has become less
important now that BJP losing in May can
no longer be off the table, as far as markets
are concerned. Recent state election results
have ensured that negative news regarding
BJP (if any) will not be a complete surprise
in May and may even get discounted before
the elections. In that case, BJP forming the
government may lead to a rally immediately
post elections with perhaps a similar fall if
the verdict is unsatisfactory or unclear. This
kind of move for the markets is not a
show-stopper as the investors will not hold
back their normal investments for +/- 5-10%
fluctuations.

The upshot: always remember that equity
markets do go up “in the long term” and
tough years in the markets are usually just
another “buying opportunity”.

Download Investment Outlook 2019

Download Investment Outlook 2018

Download Investment Outlook 2017

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Investment Outlook 2019

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