The Sensex is 35260 as of yesterday (15 Nov, 2018) – the question is will the market be at 70,000 at least on 14 Nov, 2023?
How confident are you that the market will be there or thereabouts in 2023? Assuming that you invest in the index you should expect to get at least 14% from now on on a SIP basis (or lump sum). Why am I pitching for a 14% (pre tax pre inflation adjusted) return? Simply because I got a good AAA paper yesterday at 9.9% p.a. it was a 5 year paper with 6 monthly payout. Of course it is not gilt, but I do not see any repayment risk in that paper. So if you are getting 10% in debt, should you not get 14% return on equity?
What is worrisome is selecting a portfolio for 5 years is today tougher than it was say even 10 years ago or 5 years ago. The internet, and smart businesses like Amazon, Google, etc. have crushed the margins of almost all businesses and given birth to businesses like Uber, Ola, Netflix, Swiggy, – and that is crushing some business somewhere. A bunch of young enthusiastic boys in our colony have started a morning ‘packet’ service. Orders are taken on what’s app (24×7) and at 8am a packet consisting of bread, eggs, milk, veggies, butter, cheese…..is delivered. Payments can be cash or electronic. Fairly obviously some ‘bhaiyya’ and some ‘Kinara’ shop is being impacted, and impacted badly. These boys have 1000 clients in the past 8 months. Another payment app is now tying up with them so that the money collection is made better.
Now take the case of Indian industry – the inefficient mothballed businesses are being kicked to perform or perish. NCLT will ensure far more efficient usage of assets. So Tata Steel and Ultratech cement will not be investing in any new greenfield project – they know that some unit somewhere will be available for sale and the banks will naturally ask them! So while some business somewhere is generating jobs (there are hold your breath, 16 L drivers attached to Ola/Uber – yes it has some double counting, but the numbers are mind boggling. Obviously all these jobs are just making some drivers work harder. The personal driver being used to go to office (and sleeping for most of the day) is now being made to slog by Ola or Uber. With so much of ‘old’ capital being destroyed it is indeed difficult to know whether the auto industry can hope for a nice 14% year on year growth. Will the younger gen buy ENOUGH cars to sustain the growth? and often enough? What about more and more Millennial deciding to rent instead of buying a house? with more glass and aluminium buildings, will demand for Asian Paints decrease? Will multiplexes and malls give way to big churches? Is there a need to get many people to one location with more and more efficient electronic communication?
Bank margins will get crushed is payment apps, Peer to Peer lending, mutual funds, Ulip, endowment plans etc….start cutting out the banks. In almost all businesses the new capital will kill or crush the old capital. If Namo comes back to power and initiates psu reform / agricultural reforms – we have no clue what will happen to companies like sugar, fertilizers, etc. Also remember those times when equity markets gave sensational returns there were some amazingly bad interest rate moves by Fed, RBI, etc. Today central banks are far more sensitive to market spikes – both ways. This is bad, and one day the Central bank medicine will not work, but they don’t care about the dosage. Today markets have to provide for an over-active Supreme court, and an over active RBI.
Given this scenario we have to keep wondering how many companies are going to give you returns of 14% year on year from these current prices? Imagine Hul and Hdfc will also have to ATLEAST double -actually more than double over the next 5 years if they have to take some laggards with them. Will Reliance, Hdfc, Hul, Infosys, TCS, Hdfc bank,….all of them double in 5 years from now THAT is the question that you are asking.
I am sure that in 2025 your bond portfolio will be double of what you invest now (for all investment purposes I am ignoring Income tax). Will your equity portfolio double by 2023, that is the simple question.
If yes, what is the probability that it will NOT? 10%? 30%? OR you do not know?
If no, is it time to buy bonds in your portfolio? I am sure a lot of new debt offerings are waiting to be lapped up.
If not shift to an all bond portfolio is it a good time to look at bonds too in your portfolio?
PS: MY job is to just ask, you need to find the answers yourself. I continue to be invested 90%+ in equities, but my risk profile and yours may be different. I can assure you my bond portfolio will see me through 10 years of household expenses. I need to worry after 2040, if my dividends go to zero.
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