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Happy Diwali 2014! The Annual Prediction Post, and Our Scorecard

Here’s wishing you a very Happy Diwali! Here’s the eighth edition of the Capital Mind Prediction Series, which tells you that it’s darn difficult to predict anything with reasonable success. Which is probably why last year I succumbed to the idiocy of making weasel rules – that is, making just two of three elements of Brilliant but Useless Predictions.

What Happened In The Last Year

Firstly, the markets went nuts. I mean absolutely nuts. The one year return, since last Diwali, on the headline Nifty Index alone, is 27% with the Nifty moving from 6,300 to 8,000. This has been a great year for stocks.

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The Biggest Sector Moves weren’t in the Nifty, really. Smallcaps did the best – over 58% since last Diwali, but Midcaps weren’t too far behind at 50%. The Nifty went up 27%.

Outperforming everything else was Auto, which moved up over 50%. We really don’t know why because car sales have been flat through the period, and even though we’ve seen an excise duty cut, sales haven’t gone up quite that much.

Pharma and Banks were next, with about 40% each. Banking has seen higher NPAs, credit growth slowdowns and in general a lot of uncertainty following the Coal de-allocations and other scams. Yet, they prosper in the stock market – you have been warned that being logical is not equal to getting the most wealth.

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The Losers – on a relative basis (because not one sector has been down) – are Realty, Energy, FMCG and Metals. One can understand with real estate – the price of DLF has fallen, and that is a huge part of the realty index. It’s not apparent why FMCG is underperforming or why the Media sector isn’t as good (considering this has been a great year for spreading whatever word you wanted to spread).

On the Macro front:

  • The US Fed began the exit from QE. While the taper news started in mid-2013, it went on reducing steam to the point that now, in a month or so, there could be no more buying of securities.
  • India’s inflation finally reduced to 6.5% levels in September, and this might be impetus to finally lower rates. However rates only went up till the early part of 2014, and have been stable since then.
  • The IIP and PMI data showed improvement after elections, but that also has tapered.
  • First quarter GDP growth was at 5.7% but nothing fantastic
  • The Rupee first strengthened to Rs. 58 levels (from the Rs. 68 we saw last September) and has since weakened to 61.5 to the USD. The rupee has been range bound.
  • The RBI has been accumulating forex reserves to about $318 billion (from $282 billion last year), an addition of $36 billion.
  • To protect from monetary inflation, the RBI also sold its holdings of government bonds  which kept the overall RBI balance sheet in check.

The Big Deal: Elections

Election results in May 2014 were a big surprise, with a huge majority to the BJP. We haven’t had a majority party ruling the government for 20 years or so, which effectively means the end of coalitions and the need for begging alliance partners for approval for reforms. However, with not enough members in the lower house (Rajya Sabha), it will still be difficult for this government to pass bills. That will have to wait till 2016.

The government though has had no breakthrough achievements in the year. The budget in July 2014 was almost a non-event. There have been some noises about clearing roadblocks. There was the great visit to America. There was some posturing along the J&K border about defending ourselves from the shelling from Pakistan belligerently, and building things around the border in Arunachal Pradesh. There has been some talk about easing laws to create companies, and labour law reforms. We’ve been asked to Make in India, but there’s no real reason to do so when stuff is so much cheaper abroad and you don’t have to deal with insane taxation and regulatory requirements.

In a lot of ways, just the relief that this government wont’ screw things up more will probably drive the economy up. But the expectations are very high, and given that the BJP has done very well in almost all elections since the May win, it seems people are placing their bets on the winners. The question now is: how much longer before they deliver?

Our Last Year’s Predictions…

…did reasonably okay.

  • Elections are primary mindshare. The next year’s budget will be mainly after elections. So the issue is: does the government go bonkers over public spending? Or will it try to stop a downgrade on deteriorating financials? I believe it will do a lot more of the spending.
  • The public sector will return. PSUs have been beaten down, and it’s likely they have gone more than they should. I believe next year will be the return of the PSU to the set of “attractive” stocks. PSU banks will lag the others.
  • Interest rates will rise into April. After that, I don’t know.
  • The rupee will see 68 again, and it could go into the 50s as well, albeit temporarily.
  • The RBI will unwind many of its liquidity measures and along with rising rates, we will see rising 10 year bond yields as well. This will cause temporary bouts of panic, but nothing serious in the next year.
  • You will see a much better Capital Mind.

Yes, Elections were big. But there was no big spending.

The public sector did not return in any real sense. PSU stocks have become attractive, but private sector stocks have done way better. PSU banks have in fact lagged the non-PSU banks, that’s for sure!

Interest rates did rise into April. After that, it was flat. So yes, got that bang on.

The Rupee did not see 68. It didn’t even see 63. Got that very wrong.

The RBI did unwind liquidity measures, and the 10 year bond did see a 9% print. However, it has come back to 8.38% now (with the new 10 year). So we were right there.

The last prediction, I’ll leave to you to determine! We started Capital Mind Premium, which has seen an increasingly great response, and we have multiple great things going. Our portfolio in Capital Mind Premium has a three digit CAGR since it started in December 2013. The site design has been modified to meet mobile requirements and traffic has increased. We’ve been featured in multiple TV channels, and our news and graphs have been seen in more print and online publications. But do let us know what you think!

This should however tell you about the folly of prediction. All we could do was control one variable – the “better Capital Mind” thing. The rest were potshots!

Our Predictions for the Next Year

  • Capital Mind will grow bigger (we’re moving to a new office) and you’ll see a lot more action including our data portal! And hopefully, we’ll raise funding and bring you a brilliant new way to buy fixed income products. (Hope is not a prediction but what the hell)
  • The Indian markets will surge a little further and then crash, more than 20% from the peak.  (I’m going out on a limb here)
  • This is because we have no idea how bad it is to have a financial crisis, which we will go through – what was “prime” loans to coal mines and others will turn NPA and the banking system will take a hit and time to react.
  • FIIs will eventually withdraw money from the Indian market, largely because the situation in Europe will get worse and Japan won’t get any better.
  • Rates in the US won’t change a darn thing for anyone. People will keep cribbing about it on TV forever, and if a rate hike does happen in 2015, there will be nearly no impact, flummoxing everyone once again.
  • The RBI will open up to new banks, but will only allow a handful to come up in the next year.
  • India’s market crash will spur magnificent reforms. And this is when we should find the best stocks to buy on a more fundamental basis. (We’re just playing the momentum game till then)
  • The rupee will stay under pressure, of course. However any dip will be short-term and the rupee will return to the 60-65 range, especially after the magnificent reforms.
  • Interest rates will fall in 2014 itself, and we expect rates to fall by 1% in six months.
  • Stock prices will fluctuate. (We’re very confident about this one)

Have a fabulous year ahead, folks. Stick with us, and we’ll have much better things for you. Like last time, please tell us what you love and hate about us, and we would love to know how we can improve. 

Earlier Diwali Posts:

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