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… 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.

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

  1. Subra sir,
    Excellent post. The business prospects and companies that thrive, which ones will face tough times ahead etc is very though provoking.

    As we know, we can never be sure where the market will go. At current valuation levels it is looking very unlikely.. Quoting Warren Buffet:- “The function of economic forecasting is to make astrology look respectable.”

    However, Still there are people, who in 2014 are certain 100000 for Sensex by 2020. (why wait till 2023? and why 70K?). What s more is that they have given 5 reasons why it will do so.

  2. ss I am not predicting. I am saying that if you are not confident of market giving you 14% return, you should not be investing in equities. You are getting good AAA kinda bonds will 10% yield..and short term bond fund with 11% YTM – so if not shift at least do a reasonable allocation to debt funds. No. I am not shifting…I am happy being in equities I have very little appetite for debt. Check your Asset Allocation and allocate sensibly. The risk-reward ratio is favoring bonds not equity

  3. Subra sir, I read all your posts with great interest and these are very valuable. They are very thought provoking and informative. It is pleasing to see your reply. Personally, I am in 90% FD(debt side) and 10% equity at these valuation levels. Even with the small correction in recent months The stock market is slightly taller than Burj Khalifa – with all the CAPE ratios, dividend returns and P/B stuff.. in both US and Indian markets. (US because, when US sneezes, world catches cold; and for no other reason).
    When we plot time on x axis and value on y axis, put a point 100 Rs in 2018 and 100 Rs in 2019, then we usually think the value growth is 0. In India, it is actually -ve (-8 Rs) because our x axis is tilted (100 Rs in 2018 has to become 108 Rs in 2019) and only then the value is 0. Due to inflation. But that cant be a reason by itself to assume market has presented a mouth watering opportunity.
    If individual investors now hesitate to buy something paying 150 for what is worth 100 because of a market run up, suppose. Then, if I already have some equity in hand which I know is worth only 100 Rs, but market is ready to pay 150 (because that’s the market value in current times), shouldn’t we lighten up? I wonder, what is expectation (expectation function rather than a probability function) that markets will further up than this point and the 90% equity will gain more than the debt – as opposed to – the risk that bear will take a swipe and the 90% equity will return less than debt. The markets with their earnings will have to return from this point – more than the higher of (inflation & gains returned by debt).
    Secondly the dilemma is: I am sure 2008 looks like a small anthill now and in 2028, perhaps 2018 will.. Now, suppose market is declining -30% and then going to run up 100% in second yr, then I want 90 Rs to fall to 60 Rs and become 120 Rs – OR – do I want to go 100 Rs in cash and after -30% fall have the 90 Rs go to 180 Rs? The round about question is what if it is going to go up 100% first and then fall by -30%.. This is now an Expectation function. Will it go up 100% from this point at this earnings & valuation onward? IMHO, no.

  4. SS, interesting conversation, but can we time our perfect entry like a Indian film superstar in to the equity, I doubt so
    Buy and hold with proper asset allocation is a dumb but right strategy. Perhaps good time to look deep in to
    the index fund universe for equity. More than 50 percent of largecap and midcap mutual funds have already lagging from the market returns for 1 or 5 or 10 years data.

  5. Hi Sam, you are perfectly right . If that was the case all of us would have been millionaires by now. Therefore In my first comment I mentioned prediction is not possible. Subra sir corrected me, his question was more like-if you ‘now in the present circumstances’ have 100 rs, how much is your conviction and confidence level to allocate between equity and debt? Is it 90-10 or 10-90 ? That is a personal risk profile. Subra sir is comfortable with 90 in equity. I like to wait for blood on the streets. It is a personal choice.

    Subra sir, even if a debt instrument exists which gives you close to 10% will we allocate 100% of debt portion in one instrument. We tend to diworseify. Even if that was safe, then All other debt instruments will slowly move to that interest rate.

Leave a Reply