Friday, February 23, 2024

Be bullish on India. Be cautiously optimistic on Indian stocks.

Heads of state, global Institutions and economists are all gung-ho on India’s prospects for economic growth over the next couple of decades.

You see, at its very core, economic growth is all about three factors – land, labour and capital.

India is seeing a happy confluence of these factors working in its favour. This, coupled with political stability and will to reform, is the equivalent of running a marathon on steroids.

Even if you were trying hard to ignore this economic story, you are probably already aware of this.

This is India’s time.

Now, since Contramoney is more to do with money and asset allocation and less to do with deep dives into economic variables, we will limit our discussion today to how one could potentially profit from this opportunity.

Or perhaps avoid losing money because of it.

This chart shows the performance of the Shanghai Composite Index (China’s stock market benchmark) over 25 years.

(Source: Trading Economics)

View Full Image

(Source: Trading Economics)

Not much of a move, right?

Between 1998 and 2020 (pre-covid), the Shanghai Composite Index returned just 77%.

Between 1998 and 2023, a 25-year period, the total return was just 95%. That’s just about a double in 25 years. That’s even less than the return you earn on surplus money lying in your savings account!

For a country that in the past 25 years became the factory of the world and created humongous wealth for its citizens, the stock market returns are a total disappointment.

What went wrong with China? Here are some issues that would possibly be at the top of any such list.

First and foremost, Xi Jinping’s authoritarian turn has significantly increased the risks of being invested in China.

Then, a massive crackdown by Chinese authorities on technology companies in 2021 and 2022 decimated valuations of companies such as Alibaba and Tencent.

Throw into this mix a host of poor policy decisions (in real estate for instance) and Xi’s desire to grab.

The result is that China is increasingly becoming a pariah for global businesses and investors alike. This has only worsened the situation.

None of these things seemed likely to happen at the start of this century. But yet they happened.

Now, it’s not my case that the same scenario will play out in India.

In fact, over the same period, in spite of various challenges, the Indian stock markets have grown by well over 20x over this time period, generating massive wealth.

(Source: Trading Economics)

View Full Image

(Source: Trading Economics)

My limited point here is that the future, no matter how bright it looks, no matter how well it turns out, could still deliver disappointing stock market returns.

That’s because there are unforeseen risks that could play out in the future.

Or perhaps the stock markets today have already discounted much of the future profits, leaving little on the table for future returns.

Having said this, there’s a proven way to deal with this uncertainty – the right asset allocation.

By this I mean…

Allocating well across various asset classes like real estate, gold, bonds, stocks and cash…

And with stocks in particular, allocating well to various types of stocks (small cap, mid cap and large cap) and sectors, and giving them individual weightages.

In my conversations with investors over the years, few spent time getting their asset allocation right. For most, all the focus was on stocks – usually small caps.

This approach works wonders in a rising market. But when things do not work out, as we saw in the case of China, the results could be disappointing.

In my view, a balanced asset allocation is a far less risky way to generate wealth over the years.

Yes, this approach may disappoint when the stock markets are in a massive bull run, but will more than make up for it when the markets correct sharply.

You will still have the potential to generate substantial wealth without having to ride the rollercoaster.

Here are some actionable ideas for you to consider.

First, work with an investment advisor and draw up a broad asset allocation plan that works for you (largely stocks, bonds/FDs, real estate, gold and cash).

Second, figure out a plan to get you to your right allocation over time. This is hard and could take months or even years. Stay the course!

Third, taking money off the table in a super bullish stock market is often wise. It’s mentally tough to take a call as the future looks even brighter, but you have to figure out a way to balance out your investments over time. Often, gradualism – building or exiting positions over time – works well.

Fourth, even as you consider booking profits, avoid buying into stocks at rich valuations. Instead, develop a sound stock-picking strategy. If you get this right, you could potentially generate good returns in both bull markets and bear markets.

And yes, if there are no stocks to buy, hold cash. Sit it out.

Finally, Indian stock markets are not the only story in town. Broaden your horizons and look at investing globally as well.

Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.

#bullish #India #cautiously #optimistic #Indian #stocks

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