2018 Top stock picks & 2017 Portfolio performance

2018 Top stock picks & 2017 Portfolio performance

How Indian markets performed in 2017 vis-à-vis world markets:

Before we get into 2018, let’s look back and see how the Indian markets performed in 2017 vis a vis the world markets. Indian indexes rose to  record levels in a significant double digit growth not seen in recent years. While Sensex rose by 28% with respect to 2016 closing levels (from 26626  levels to 34057), NIFTY rose by about 30% . US markets performed at a middle of the pack performance with S&P 500 index rising at 20% mainly buoyed by Trump related “America first” policies ,expectations of corporate tax reforms, positive growth outlook & Fed rate hike related outlook . German Dax rose by 15%, Japanese Nikkei rose by 20% while MSCI emerging market index rose by 35%.

India was the 3rd best emerging market in the world this year after Turkey and Argentina. The smaller stocks in India did even better with BSE midcap index rising by 48% and BSE small cap index surging by 60% in 2017.  Indian indexes showed a good performance mainly due to global/domestic liquidity, government. reforms , RBI monetary policies, state elections and expectations of corporate earnings recovery

While FIIs invested 51,000 crore in Indian equities in 2017, DII/mutual funds pumped a record 1.2 lakh  crore into equities reflecting a transformation in the country’s savings culture triggered by demonetization in the end of 2016. Investors have shifted from physical to financial savings leading to sharp inflow into equity mutual fund schemes through SIP(Systematic investment plan) mechanism . More than 6000 Crore flows into equity funds now per month via SIPs, a 50% rise in 1 year(Flow was 4000 crore per month in 2016 end).

How my 2017 model portfolio performed (Top 14 stock picks)

Pl refer to my blog (dated 6th January 2017) where I had mentioned my top 14 stock picks for 2017(model portfolio 2017).My 2017 model portfolio showed a gain of 41% versus 27% of Sensex gains(till 31/12/2017). So it beat the Sensex performance handsomely .The 4 top gainers were Dewan housing( 135%), India Bulls Housing Finance(82%) Bajaj Finance(106%) and Maruti(81%). The top loser was Tata Motors(-11%) while Aurobindo Pharma was flat at 2%. Pl refer to my 2017 portfolio tracker on the Right hand side of the blog to get the details.

2017 Portfolio results tracker, as per the data on 31/12/ 2017

Blog Media Jan 3

Click the above link to Enlarge.

Lets see how my 2016 January model portfolio, 2015 model portfolio, 2014 model portfolio & 2013 model portfolio performed in 2017, as per the portfolio trackers on the blog page (Viewed on the right of the blog page) . The 2016 January model portfolio had gained 61 %( from Jan 2016 till today) versus 29% of Sensex gain after Jan 2016, hence beat the Sensex with a good margin (alpha). The 2015 January model portfolio had gained 50 %( from Jan 2015 till today) versus 23% of Sensex gains after Jan 2015, hence beating the Sensex with a good margin (alpha). The 2014 January portfolio had gained 120 %( from Jan 2014 till today) versus 59% of Sensex gains after Jan 2014. We have similar story for 2013 January model portfolio too(155% portfolio gains versus 74% sensex gains after Jan 2013 till today).Pl prefer to the portfolio trackers for 2016,2015. 2014 and 2013 on the right hand side of the blog to get the details..

Blog Media Jan 2

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My forecast of the Indian markets :

I am a long term investor who focuses on long term trends and projections of the economy/ market and my favorite businesses/stocks. I would not dare to venture into the short term precise Sensex forecast as markets are very unpredictable in short term. This year , Global markets might be volatile   especially the first half of the year due to factors like Fed increasing the interest rates, dollar strengthening , Trump actions/initiatives, commodity price rise, Geo-political tensions like North Korea, Chinese economy slow down etc. These global factors will definitely have an impact on Indian markets. Domestic factors like positive impact of demonetization, implementation of GST, 2018 Budget proposals, Government’s execution speed on reforms/ initiatives like Banking recapitalization program ,  restart of investment cycle and corporate earnings pickup will have an impact on the market levels. Government Infra spending on roads, railways, ports, defense etc. will also play a significant impact. My hunch is that 2018 would see a subdued market performance, after a superlative performance in 2017. The market will rise in tandem with the corporate earnings growth as the PE multiples are already at a premium with the historical averages(22 times forward FY18 earnings when compared to historical forward earnings multiple of 16 times). The expected earnings growth in the calendar year and the positive impact of GST  has already been partially factored in the current prices. Hence the year might see moderate gains and the investors should pare down their expectations to 10-15% growth in the market indexes.  Therefore this year (CY 2018) is going to be a stock picker’s year where one has to make careful choices about the businesses/stocks .

After clocking substantial returns in 2017, equity investors in 2018 enter the new year with lots of macro challenges and worries on earnings growth in their minds. They will keep a close watch on rising crude prices, rising inflation trends, lower GST collections , burgeoning fiscal deficit concerns on Govt. possibly missing the fiscal consolidation roadmap. The rising inflation and crude prices might prompt RBI to reverse the monetary policy and start hiking the rates .While the macro challenges will be in the minds of investors , there are couple of green shoots too which the investors should keep in mind.  The ghosts of  demonetization and GST which got implemented in first 2 quarters of 2017 , will come to haunt in a positive way as they stalled economic growth in the first 2 quarters of 2017. Hence they will give speed and strength to the first 2 quarters of 2018 due to favorable base effects. By the time , Government promised bounty of Infrastructure investment , especially into roads, railways and housing will start pouring in , kickstarting a new cycle of investment growth . Banks would get large doses of capital( as a part of recapitalization program of Rs. 2.1 Lac crore )and would be in a position to meet the revived demands for credit or investment. The increasing and steady FDI and FPI inflows as well as  steady inflows from domestic investors into equity funds are the other factors which might support and stabilize the market  growth  in the coming year.

I would like to repeat that India economy and the market have already started a strong and long term structural bull market in 2014(I had predicted the same in my multiple blogs in 2012 and 2013). There could be small and temporary corrections or fall in the market(like we had in 2nd half of 2015 when Sensex came down from 30000 to 26000 and last quarter In 2016 when Sensex fell from 29000 levels to 26000 level) but the long term trends should be a very positive one for next 15 to 20 years . As far as my long term Sensex prediction is concerned, I am predicting Indian market(Sensex) doubling up every 4  years for next 16 years which means Sensex multiplying 16 times in 16 years (reaching about 5,50,000 by end of 2033). This means that you can multiply your wealth 16 times in  next 16 years just by investing in Sensex EFT or index funds. If you do a bit of quality stock picking, you can beat this rate and multiply your wealth by 20-30 times by 2033 . This kind of long term wealth creation opportunities can happen only in rare asset classes (like Indian blue chip equities) in the world. The economic and investment cycles have bottomed and will show a sustained long term positive trend from now. The macro variables have improved a lot with CPI inflation at <5% , Fiscal and Current account deficits under good control, stable government showing positive signs of reforms, stable currency, stable foreign exchange reserves etc .

My 2018 Model Stock portfolio

In summary , the macroeconomic and global factors are uncertain and cloudy which could be creating further volatility . Hence 2018 is going to be a stock picker market not a general market condition where you can bet on Index and certain sectors  .Hence the need to have a disciplined bottoms-up approach to research and pick the right business –quality businesses run by quality management with strong balance sheets, earning decent return of capital/ equity(ROE) and good long term growth outlook/track record, available at attractive prices/valuation( providing decent margin of safety). As per my tradition in last few years, I am publishing my top 15 stock picks for 2017(model portfolio 2017) in which I am investing now .

My 2018 Portfolio of Top 15 business/ stock picks(stock related data as per 1st Jan 2018) :-

Blog Media Jan 1

Click the above link to Enlarge.

what are the sectors which could yield some great bottoms-up opportunities? Some of the sectors I like are consumer focussed Niche NBFCs(Non banking Financial companies) like Housing Finance companies (Dewan Housing Finance & India Bulls Housing Finance)and consumer Finance companies( Bajaj Finance & Chola mandalam investments), as government is pushing affordable housing & consumption in a big way , private banks with good NPA and growth track records(Yes Bank & IndusInd bank), discretionary consumption sectors like (Maruti Suzuki) because of consumption and rural sectors picking up, Infrastructure sectors(Power Grid, Adani ports and Dilip Buildcon)since the government is launching big ticket infra projects like Bharat-mala and sagar-mala projects. Apart from these sectors , there are some value play sectors like IT and pharma(HCL Technology, Ajanta pharma & Aurobindo pharma )which have corrected significantly due to some temporary headwinds and would need some stock based research to pick few companies which will turn around and show significant returns in medium term. Last but not the least , agriculture and food processing sector (UPL and Avanti feeds)is a good sector due to rural focus and spending by the current government. These are the 15 stocks I have picked up carefully for focussed and long term investing in 2018. Out of these 15 stocks, 10 have been repeated from my recent model portfolios while 5 are new ones.

All these businesses are quality businesses with durable competitive advantage with excellent returns on capital/equity(Consistently high ROE), strong balance sheet( reasonable Debt/equity, Debt/Profit ratios ), competent managements and stable growth records/outlook( Consistent Sales and Profit growth rates) and yet available at under-valued/fair prices ( reasonable PEG ratio and PE ROE ratios) , providing a great “margin of safety” for value and long term investors. This market is in a long term structural bull rally and therefore any fall or correction would be temporary and should be treated as a good opportunity to invest in these quality stocks or businesses for long term with a long term returns of 20-25% per year (on an average).

Wish you a very happy New Year again and Happy investing,
Cheers Amar

I am an IIM Bangalore Alumnus & NIT Allahabad Engineering graduate with 18 years of global experience into service and outsourcing industry. Value Investing has been one of my passions for last 8 years.

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