Hello readers,

This is very interesting times for the Indian market with the markets (Sensex and Nifty) touching new highs in recent times (22700 and 6800) with gloom and pessimism being replaced by optimism and hope. The NAMO victory is already discounted in the market prices and any negative surprise with NDA winning less than 200 seats could upset the markets leading to 10-15% declines in the short term. Strong victory with > 220 seats for NDA could result in 4-5% uplift in the market with Sensex going near 24000 in short term. My predictions at the start of the year(in my last blog on 15th Jan), when we were at 21000 that we will cross 24000 this year should come true soon, if we don’t see a negative surprise in election results.

While the market have gone up by 7% in 2014 till date (after clocking growth in Q4 of 2013), its still has some steam left as many investors (mainly the retail investors and Domestic institutions) are still waiting at the sidelines for the results and reforms. Any strong and stable govt. at the center will quicken the pace of reforms and project approvals which in turn will help to pick up the GDP growth to >6% in FY15 and kick start the investment cycle. The recent good news on inflation (with CPI dipping below 9%) and CAD(current account deficit) dipping below 1.5% is going to put a decline pressure on the interest rates which in turn will be a powerful booster to the investment/ growth cycle. However , since the market has already reached peaks , we will have to be more cautious in picking up fundamentally strong blue-chip business/ stocks through a thorough bottoms up analysis in few sectors which are linked to interest rate and investment cycles(mainly Banking and Finance, Auto, Infra, capital goods etc). Any wrong selection based on general euphoria could be disastrous.

Let me refer to my last blog dated 15th Jan 2014 with title “My 2014 Top stock picks and 2013 portfolio performance” where I had recommended the following 15  stocks for  2014 portfolio

Company Sector
Axis Bank Banking & Finance
Bank of Baroda Banking & Finance
ICICI BANK Banking & Finance
Bajaj Finance Banking & Finance
LIC Housing Fin Banking & Finance
IDFC Infrastructure
Larsen Infrastructure
REC Power
Powergrid Power
Reliance Energy
GAIL Energy
Coal India Energy
M&M Auto
Bajaj Auto Auto

 I had provided the following logic and rationale for selecting the stocks/businesses in the referred blog

“The portfolio is heavily loaded towards Banking & Finance, Infrastructure/ Power, Energy and Auto sectors. These sectors are primarily interest sensitive and capital intensive sectors. Though the market (Sensex) has attained new peaks and have shot up >15% in last few months, this rally has not been broad based and has been limited to few sectors like IT, Pharma, consumer/FMCG and export driven businesses etc. However, other sectors like interest and capital intensive sectors have been left behind in the rally and we can still discover value in these sectors.

My favorite sector is Banking and Finance as I feel that this sector has bottomed out and will start looking up in next 6 months as the interest rate cycle reverses itself and investment cycle picks up after elections. The over-reactive market has hammered even the best banks and Finance companies with solid balance sheet, growth and NPA records with the same short sighted brush as the weak B&F businesses. Consequently solid B&F businesses like Axis Bank, ICICI bank, BOB, LIC Housing Fin are still available at attractive prices below their intrinsic values. Infrastucture/ Power sectors are going to benefit once the investment cycle picks up in second half of 2014 after the elections . The recent fast pace of clearance and approvals of about 3.5 to 4 Lac crore worth of projects by CCI(Cabinet Committee of Investments) and the new minister of Environment & Forest(Mr.Moily) will play a key role in starting this investment cycle. With this the best blue chip businesses among these sectors like L&T , IDFC, REC and Power grid which are available at very attractive prices will register very decent gains. Auto sector will again benefit from reversal of interest rates ,pick up of GDP growth and pick up of rural demand due to good monsoons in the second half of of the year and hence have picked up the safest and defensive bets in these sectors(M&M and Bajaj Auto) which have a good rural exposure too. Energy will always be an ever green sector in energy starved country like India and have therefore picked up the best businesses like Reliance, GAIL and Coal India again. Lastly picked up an IT sector stock(HCL Tech) as this sector will continue to grow in 2014 and 2015, especially HCL because of its strong growth track record, attractive price/ value equation and exposure to Infrastructure management where it a clear global leader.”

Good news is that my 2014 portfolio has shown good results in the last few months , clocking a growth of 11% in 2014 till date with respect to 7% growth in Sensex. The key growth drivers are Bank of Baroda(20.5%), L&T (21.5%), Axis Bank and ICICI bank(15%), LIC Housing finance(16%) ,IDFC(13%). Bajaj Finance(12%) . The only business which showed a dip was Coal India(-1.4%).

This has reinforced my view and prediction that best businesses in few sectors like Banking and Finance, Infra, capital goods, Auto etc. will do better this year as the investment cycle and interest rate cycle starts showing signs of positive reversal.

These are solid businesses with sustainable competitive advantages and strong balance sheets run by excellent managements, linked to sectors which have been steadily battered and hammered by over-reactive markets in last few quarters due to macro and industry specific issues , through these businesses specifically didn’t have any significant issues. They will continue to do well in the year and next year giving an annualized growth of 20-30% per year. The key is to pick the right businesses in the right sectors and stay with them for few years so that they reach their true potential in terms of their intrinsic values.

I would like to end the article with few quotes from my gurus in investing.

Benjamin Graham (Guru of Warren Buffet and father of Value investing) once said that “ the market is a voting machine in short term and weighing machine in long term.”  The markets are unpredictable like voting machines in short term and make pricing mistakes but eventually recognize the true value/ intrinsic value of the business/ stock in long term like a reliable weighing machine. So , the key is to pick the right stocks and show patience and conviction.

Warren Buffet once said that “ Be greedy when everybody is fearful and be fearful when everybody is greedy” . Since the markets have reached new peaks , we should be cautious in picking the right businesses in right sectors through solid fundamental/ value based analysis. I don’t think that we need to be fearful yet as the market and select sectors have some steam left for an upward surge and we are definitely not in “euphoria” state of 2008.

Happy investing