The Nifty was mostly in negative territory through the year and was down 8.9% for FY2016. Though the Nifty was up 26.7% in FY2015, the fall in the current year has eroded most of the gains of the previous year. Effectively, if one had invested 100 in the Nifty on 31-Mar-14, it would have been 126.7 on 31-Mar-15 and 115.4 today. Our portfolios did substantially better than the Nifty in FY2015 and have managed to protect that gain during the current year.
The Indian stock market, and for that matter, the rest of the world as well, have been in a funk since the Great Recession of 2008. The Nifty has delivered about 6.3% p.a. over the last 8 years and 8.6% p.a. over the past decade – this is way below the long term average of 14-15% p.a. One big reason for the huge under-performance over the 8 year period was the high valuations in Mar-08. Earnings growth since Mar-08 in the aggregate, has also been weaker than historical trends, as margins for corporate India have got squeezed.
It is our belief that the current government, perhaps emboldened by its majority status, has unleashed a series of economic reforms that are necessary for India to get out of its sub-par per capita GDP. Unlike the past, these reforms are driven from a position of confidence, evidenced by record forex reserves and driven by a management team (the government and the RBI) which we believe, understands what is needed to quell inflationary expectations and drive the freeing of animal spirits through ease of doing business and transparency. This has the potential to drive structural change in the economy which could enhance productivity significantly. While most commentators have been lamenting the lack of growth in the economy over the last two years, it appears that much of the work done by the government over the last couple of years is showing up now – in various measures being taken to enhance transparency and remove structural bottlenecks in the economy. Examples of this are the apps that the government has launched for electrification, railways, etc. which allow the populace to track the progress of these departments and also provide access to them.
In finance there is a term called ‘mean reversion’ which implies that periods of lower returns are systematically followed by periods of higher returns and vice versa. A decade of poorer than historical market returns sets us up very nicely for the next decade. India should remain among the top two growing large economies in the world, with a potential to invite huge investments into its infrastructure and in creating jobs for what is perhaps the largest workforce pool in the world today. We believe that the current set of reforms should push up productivity in the economy driving a higher growth rate over the next many years.
Notwithstanding everything stated above, challenges remain in the form of the global economy which continues to suffer from excess leverage over the years and associated risks, if the bank NPA situation does not get corrected, despite much needed recent focus on this, from the RBI and the banks. We are now regularly seeing many promoter equity stakes being put on the block by banks. We look forward to earnings reverting to the mean over the next few years and we like the valuations at which some of the wonderful businesses that we wish to buy over the long term, are trading currently and this, we believe, sets us up well for return expectations into the medium and long term.