Saturday, February 9, 2013

So 2013 comes in and out goes 2012! Wow, time flies! So if you have been reasonably following my blog, turns out some things have turned out as predicted and some have not. Corporate run rate has continued as expected whilst some counters recommended have rallied - Like Bajaj Auto, Cipla, HCL, L&T, Adani Ports etc. Some recos have not taken off like Hindalco and Cairn and some have been positive howlers like Crompton!

So how have my investments done in the last year and half? Netted about 35%. Not bad, but market also rallied 25-28% from those levels, so yeah, an alpha of about 6-7%. Partly aided by asset allocation calls and partly by good stocks (Or so I would like to believe!)

What is in store for 2013? Well for one, lets look at the good things

1. Awesome awesome liquidity! - Be it US Fed or ECB or Bank of Japan, everyone had opened their taps in 2012 and it continues. So those flows do find a way in to emerging markets like ours and in fact, 2012 has had more than a fair share of flows for India compared to historical rates (40%+ compared to 25-30%). So yes, good for equities! Also, global risk on means that people are ditching low yield bonds and moving to risk assets - Equities. All global indices have smartly rallied reflecting that. So the central banks have pushed out yields and prodded people to get into risk assets, this theme may continue to play out

2. Government Reforms - So the intent of the incumbent government is clear. Make the right noise, make parliament function and ensure some reforms go through. Hence Retail FDI being passed, Banking Regulations done, Diesel partial de regulation done, SEB reforms...all point to a government now willing to take such steps to reduce deficit and a possible downgrade to junk status for India!

3. Continuing corporate run rate - Companies have been chugging along the growth path largely, barring a few misses here and there. Augurs well for business case as well as keeping valuations around median levels.

Bad parts??
1. Continuing twin deficits - No way we can meet the deficit target set out in last year's budget. Exports not reviving. Crude poses an ugly threat and so do gold imports.
2. Pulling the plug? Some turbulence in global markets would mean that flows can evaporate from EM. Not good news for a high beta market like ours!
3. Private Capex - We need investments in infrastructure to kick off. Without that we would just be running on fumes. Also, more reforms would be needed like GST, Land Acquisition Bill etc. Lets see where this goes. Markets have run up ahead in terms of hopes.

So what does one do in such a case? Stick with quality names till macro emerges clearer. Do not get into the hype n trap of media where they talk up a sector for a month and then dump it! Be slightly ahead of the curve taking a longer term 2-3year call. Clearly would want to prune names in FMCG, Pharma, Auto which have run up steeply in 2012 and have little juice left. Would want to play cyclical stories which have stronger structures and benefit from possible future reform action - Power, Cement, Capital Goods. However, good FMCG Bank Auto names would still merit inclusion.
So ideally good stocks for 2013 could be L&T, ICICI Bank, BoB, SBI, HDFCB as all time fav, Colgate, ITC, NTPC (my fav!), Hindalco (yes I persist!), Cairn, ONGC, Cipla/Lupin. Further pushed out in blue sky 5yr time frame scenario would be slightly riskier bets like Jubilant Food, McNally Bharat, Treehouse Edu and Motherson Sumi. Nestle Adani did well and remain favorites.
What all the aforesaid stocks have in common is a good business model, reasonable industry size and scope and positioning within the industry and stellar BS/Financials. Look for these whenever investing in any stocks. Like I have said before, think about investments as how you would when analysiing a business proposal. GIve thought to future growth, how the company can scale up and manage cash flows and what is the deal (CMP) at. So looking at stocks as businesses than mere scrips would really help analysis and augment your time horizon/outlook.