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The Jewish Wealth Legacy: How Jewish Families Educate Kids About Money

The Jewish community has earned a reputation for its remarkable prowess in money management and wealth creation. A testament to this is the presence of five Jewish individuals among the top 10 wealthiest Americans, including notable figures like Mark Zuckerberg of Facebook, Larry Ellison of Oracle, Larry Page of Google, Sergey Brin of Fellow, and Michael Bloomberg.

Remarkably, while Jews constitute just 3% of the American population, they account for a staggering 67% of Forbes 400 richest Americans.

In the quest for financial acumen, I have delved into numerous books expounding on the art of prudent money management and debt resolution. However, it is the straightforward yet immensely practical approach employed by the Jewish community that has seized my attention and kindled my imagination. This approach centers on the financial education provided to Jewish children from an early age.

 

Within Jewish culture, the process of teaching children about money commences almost as soon as they are able to articulate words. This practice is deeply rooted in an understanding of the biblical adage, “Teach a child the way of the Lord, and when they will grow, they will not depart from it.” Consequently, the transmission of financial knowledge to the younger generation is an integral facet of Jewish heritage. Children, characterized by their receptive nature and eagerness to learn, serve as ideal recipients of these teachings.

To cultivate wise money management skills in their offspring, Jewish parents employ a practical tool: five labeled jars, akin to contemporary piggybanks or home banks. Each jar is designated for a specific financial purpose and features an accessible top for ease of use. These jars bear the labels TITHE, GIVING & OFFERING, SAVING, INVESTING, and SPENDING. Whenever a child receives an allotment of 10 Shekels, the currency of Israel, they are provided with the following instructions for allocation:

–One Shekel shall be apportioned to the TITHE jar (equivalent to10% of the allotment). This practice, deeply rooted in Jewish philosophy,instills in the child the virtue of generosity by prioritizing contributions tocharitable causes.

–Another Shekel shall be earmarked for the GIVING & OFFERING jar(also constituting 10% of the allotment). This principle reinforces the notionthat one should prioritize the needs of others before tending to their own,emphasizing a sense of social responsibility.

–One Shekel shall be reserved for the SAVINGS jar (equivalent to 10% ofthe allotment). This allocation is intended to serve as a financial cushion forunforeseen emergencies, teaching the child the importance of fiscal planning toaddress unexpected financial challenges that may require immediate attention.

–Two Shekels shall be dedicated to the INVESTING jar (20% of theallotment). This allocation encourages the child to develop an earlyunderstanding of investment and the potential for wealth accumulation overtime.

–The remaining five Shekels shall be designated for the SPENDING jar (50%of the allotment). This allocation allows the child to manage discretionaryexpenses for their personal use.

The rules governing access to these funds vary: the GIVING jar may only be opened on Sundays, the TITHE jar is unsealed at month-end, the SAVINGS jar is reserved for special occasions or emergencies, and the INVESTING jar is unlocked when it reaches full capacity. Crucially, the child exercises complete autonomy in determining when and where to invest the accrued funds, with parents refraining from intervention, even in the face of potential missteps. The Jewish tradition holds that failure serves as an invaluable teacher, fostering creativity in decision-making and nurturing a sense of responsibility for one’s choices.

Research attests to the formidable challenges posed by financial management in our lives. Successfully navigating this terrain can significantly ease the management of other life aspects.

Consequently, Jewish children, armed with a strong sense of responsibility and financial acumen, often experience heightened satisfaction and success compared to their peers. In stark contrast to the credit card debt woes experienced by many Americans and Europeans, the dispersed Jewish community thrives in both personal finances and business endeavors.

For those of us who did not have the privilege of undergoing these transformative lessons in our early years, there are valuable lessons to be gleaned. First and foremost, making a concerted effort to impart financial wisdom to our own children is among the most worthwhile investments we can make in their future. Additionally, adopting a receptive attitude and embracing these principles, regardless of age, can yield significant benefits. While it may seem unconventional, embarking on this financial journey, perhaps alongside your children, can prove rewarding.

In summary, the financial teachings passed down within the Jewish community serve as a compelling model for instilling responsible and informed money management from an early age. By embracing these principles and passing them on to future generations, individuals and families can empower themselves to achieve financial stability and success.

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MONTHLY MARKET UPDATE & OUTLOOK – AUGUST’23

Uday Kotak: The King retires, leaving a legacy to reverberate through Kotak Mahindra Bank

Some key financial facts:

  • Kotak Mahindra Finance Ltd. (now Kotak Mahindra Bank Ltd.) went public in 1992. On the day of listing the share was listed at Rs. 1,300 to 1,400 against the issue price of Rs. 45 per share (Single day gain of 2,800%).

  • An investment of Rs. 10,000 with Kotak in 1985 would be worth around Rs. 300 crore today – implying an IRR of 39% excluding dividends.

  • Uday Kotak is the Asia’s richest banker with a net worth of $14.8 billion. He owns 26% of the bank.

  • During the Dot Com bubble burst in 2002-03, Kotak’s shares experienced a significant decline of 89%, plummeting to Rs. 1.44. Similarly, during the Global Financial Crisis in 2008-09, the share price saw a substantial drop of 78%, reaching Rs. 60. However, despite these tumultuous periods, Kotak Mahindra Bank has delivered substantial wealth for its shareholders.

  • Today, the share price stands at a robust Rs. 1824, reaffirming our investment philosophy: the value of investing in high-quality businesses with strong and prudent management.

Uday Kotak has relinquished his position as Managing Director and Chief Executive Officer of Kotak Mahindra Bank, an institution he founded in 1985, and currently ranks as India’s third-largest private financial entity in terms of market capitalization.

The remarkable accomplishment underscores the exceptional achievement realized by Mr. Kotak. Rarely in the global financial landscape has such an expansive conglomerate within the financial services sector emerged within a single generation. Originating as a modest bill-discounting enterprise, it has metamorphosed into India’s third-largest private bank in under four decades, chiefly due to the vision and relentless dedication of its creator. Uday Kotak, who affixed his own name to the institution, tirelessly worked to cultivate trust and credibility.

While the brand ‘Kotak Mahindra’ will continue to bear his surname, Mr. Kotak has chosen to transition to a more subdued role within the organization. It is fitting and deserving that Uday Kotak receives due recognition and appreciation for his extraordinary contributions.

Wealth Creation Chart:

Quote of the month

Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow.

The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.

– George S. Clason, The Richest Man in Babylon

From the global leaders:

The Indian macro dataflow has continued to exhibit resilience and strength across various key indicators:

 

  • Manufacturing PMI: In August 2023, the Manufacturing Purchasing Managers’ Index (PMI) registered a value of 58.6. It remained within the expansion zone (>50) for the 26th consecutive month. This sustained expansion was underpinned by new orders’ growth, which reached its highest level since November 2022.

  • Services PMI: The Indian Services PMI cooled down to 60.1 after achieving a 13-year high level of 62.3. This robust performance was buoyed by strong demand, both domestically and in the export sector.

  • GST Collection: August 2023 witnessed GST collections amounting to Rs. 1.59 trillion, reflecting an 10.8% year-on-year increase. This achievement marked the eighteenth consecutive month of collections surpassing the Rs. 1.4 trillion threshold.

  • Credit Growth: Credit growth reached 19.72% YoY as of 11th August 2023 against YoY growth of 14.11% as observed on 12th August 2022.

  • Inflation: July’s CPI inflation rate breached RBI’s comfort zone and reached 7.44% in July 2023, from 4.81% in June 2023, at a 15-month high. WPI inflation remained in negative territory, with the July 2023 print at -1.36%, 276 bps down from June 2023’s at -4.12%, as higher prices for food and commodities played into a higher base. This was the fourth straight month of deflation witnessed.

  • Foreign Exchange Reserves: India’s forex reserves jump $4.03 billion to $598.89 billion for the week ended September 1, 2023.

  • Trade Deficit: July 2023 Trade deficit stood at US$21 bn (second highest in current financial year) driven up by slowing export momentum & resilient domestic demand.

     

Collectively, these indicators portray a dynamic economic landscape, characterized by both accomplishments and challenges, as India navigates through evolving global dynamics and domestic circumstances.

Equity Market Overview:

  • The BSE Sensex fell by 2.5% in August.

  • BSE Mid-cap and small-cap indices outperformed the Sensex and were up +2.6% and +6.1%, respectively.

  • Net FII flows, continued to be positive for August, albeit at a lower quantum (+$1.2 Bn, following +$4.2 Bn in July). DIIs turned into marginal net buyers of Indian equities.

  • Sector-wise, Oil & Gas, FMCG and PSU indices saw the greatest declines, falling 5%, 4% and 2.7% respectively m/m. Top gaining indices were Consumer Durables and IT, which were up 4.2% and 4.1% respectively.

  • Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 15,814 crore for the first time. This highlights the strong confidence Indian investors have in equities.

 

Fixed Income Landscape:

  • G-sec yield were elevated during the month on higher-than-expected domestic monthly inflation print and higher US rates. That said, the second half of month saw rates cooling off a bit on tomato prices coming down and easing US rates on softer flash PMI print and employment data.

  • In Jackson hole symposium, US Federal Reserve Chair Jerome Powell emphasized the potential necessity to implement additional interest rate hikes in order to effectively manage inflation.

 

Market Outlook:

  • Higher interest rates have exerted pressure on the global economic outlook. While inflationary pressures appear to have peaked on a global scale, Central Banks remain watchful of the persistently elevated inflation rates. It is anticipated that interest rates will remain elevated for an extended period, contingent upon data-driven policy actions.

  • Despite prevailing global uncertainties, domestic macroeconomic trends have demonstrated resilience. Encouraging signs of recovery are discernible in industry capital expenditure, potentially bolstered by initiatives such as the Production Linked Incentive (PLI) and localization efforts, including the China+1 strategy. Furthermore, there are early indications of a rebound in rural demand.

  • India’s external economic situation benefits from robust services exports and reduced imports. Key indicators such as tax collections as a percentage of GDP, credit as a percentage of GDP, and notably, the increasing corporate earnings as a percentage of GDP reflect the effectiveness of transparency and formalization reforms implemented prior to the pandemic.

  • Valuations in the near term continue to present challenges. In the current market environment, the careful selection of stocks and rigorous risk management are paramount. We maintain our emphasis on sectors linked to domestic demand, as these segments may offer higher levels of growth and earnings certainty.

  • We firmly believe that India’s medium to long-term prospects remain robust, driven by investment cycles and policy reforms. Consequently, we recommend that investors adopt a long-term perspective when considering equity investments, taking into account their investment objectives and risk tolerance. Investors may opt for a phased approach to navigate the short-term uncertainties, while those with a more conservative stance might consider asset allocation strategies.

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India’s Remarkable Journey from ‘Fragile Five’ to World’s Most Sought-After Investment Destination

India, a land rich in history, culture, and diversity, has undergone a transformative economic journey over the past few decades. From being labeled as one of the “Fragile Five” emerging economies with vulnerabilities in 2013, India has emerged as one of the world’s most sought-after investment destinations in just a matter of 10 years. This remarkable transformation is a testament to the country’s resilience, policy reforms, and commitment to growth.

The Fragile Five and Economic Challenges:

In the aftermath of the 2008 global financial crisis, India, along with Brazil, Indonesia, Turkey, and South Africa, was branded as part of the “Fragile Five.” These countries exhibited economic vulnerabilities such as high inflation rates, fiscal deficits, current account deficits, and weak currencies. India faced challenges like inflationary pressures due to rising food and fuel prices, a large fiscal deficit, and a persistent current account deficit.

2013: Morgan Stanley coined India as a part of ‘Fragile Five’

2023: Morgan Stanley upgraded India to No. 1 slot in its emerging market portfolio

Structural Reforms and Policy Initiatives:

Recognizing the need for comprehensive reforms, India embarked on a path of transformation. The government, under the leadership of Prime Minister Narendra Modi, initiated a series of policy measures to address these vulnerabilities and promote sustainable economic growth. Key reforms included the Goods and Services Tax (GST) implementation, the Insolvency and Bankruptcy Code (IBC), and the “Make in India” campaign to boost manufacturing and enhance the ease of doing business.

Digital Revolution and Innovation:

One of the pivotal factors in India’s transformation has been its digital revolution. The rapid expansion of internet connectivity and the adoption of digital payment systems through initiatives like “Digital India” have led to increased financial inclusion and economic empowerment. Moreover, the country has witnessed a burgeoning startup ecosystem, with innovative companies across sectors like technology, e-commerce, and fintech attracting significant investments.

Foreign Direct Investment (FDI) Surge:

India’s commitment to economic reforms and its demographic advantage have attracted substantial foreign direct investment (FDI). Sectors like information technology, renewable energy, pharmaceuticals, and retail have witnessed significant inflows of FDI. The government’s efforts to simplify FDI regulations and improve the ease of doing business have further boosted investor confidence.

Infrastructure Development:

India’s focus on infrastructure development has been a driving force behind its transformation. Massive investments in transportation, energy, and urban development projects have not only created jobs but also improved connectivity and quality of life for its citizens. Initiatives like “Smart Cities” and the development of industrial corridors have modernized urban centers and bolstered economic growth.

Geopolitical Significance:

India’s economic resurgence has not only contributed to its own growth but has also elevated its global geopolitical significance. The country’s large and diverse market, skilled workforce, and strategic location have made it an attractive destination for international businesses seeking to expand their footprint in the Asia-Pacific region.

Challenges Ahead:

Despite its remarkable progress, India still faces challenges on its path to sustained growth. Income inequality, inadequate access to quality education and healthcare, environmental concerns, and bureaucratic red tape remain areas that require attention. Continued efforts to address these issues will be crucial for inclusive and sustainable development.

Conclusion:

India’s transformation from being part of the Fragile Five to becoming one of the world’s most sought-after investment destinations is as tory of resilience, reform, and innovation. The nation’s commitment to economic liberalization, infrastructure development, and technological advancement has propelled it into a new era of growth and global influence. As India continues to navigate its journey, its ability to overcome challenges and embrace opportunities will determine its place on the global stage for years to come.

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Your Antidote to Boring SIPs

The conventional wisdom surrounding systematic investment plans (SIPs) often paints them as dull and uneventful. However, we’re thrilled to introduce compelling solutions that redefines the investment landscape and empowers you to break free from the monotony (and at the same time create more wealth).

 

Our team has meticulously crafted three distinct SIP strategies designed to optimize returns and minimize risk. Each strategy leverages different mechanisms to ensure that your investments yield exceptional results.

 

A. Step-Up SIP: Gradual Growth with Every Year:

 

Our Step-Up SIP strategy introduces a controlled increase in investment amount year by year. This gradual escalation, by 10% annually, ensures a steady progression of your investment journey. For instance, an initial monthly SIP of Rs. 10,000 will evolve to Rs. 11,000 in the subsequent year, and further to Rs. 12,100 in the second year, and so forth. This incremental approach is tailored to align with your financial growth trajectory.

 

B. Dynamic SIP: Seizing Opportunity Amidst Volatility

 

Our Dynamic SIP strategy capitalizes on market volatility to optimize returns. Whenever the Net Asset Value (NAV) of the fund experiences a 10% correction, the monthly investment amount is doubled until the fund’s NAV regains its original value. For instance, a Rs. 10,000 monthly SIP could potentially surge to Rs. 20,000 if the fund’s NAV corrects by 10% and subsequently recovers to its original NAV. This strategy allows you to harness market downturns for greater gains.

 

C. Combination of Step-Up + Dynamic SIP: The Best of Both Worlds

 

Our Combination Step-Up + Dynamic SIP strategy amalgamates the benefits of controlled annual increments and market-responsive doubling. With this strategy, your SIP amount increases by 10% each year, and in addition, doubles when the fund’s NAV corrects by 10%. This synergistic approach optimally balances consistent growth with capitalizing on market dynamics.

Empirical Validation: Nippon India Growth Fund (erstwhile Reliance Midcap Fund) Backtesting

To substantiate the efficacy of our innovative SIP strategies, we conducted rigorous back testing using one of India’s oldest midcap funds, the Nippon India Growth Fund* (inception date: October 08, 1995). The results were nothing short of remarkable.

A conventional SIP approach with this fund since inception would have yielded the following outcomes:

However, the three approaches highlighted above yielded the following results:

In conclusion, our innovative SIP strategies offer a dynamic perspective on wealth accumulation, each tailored to suit your risk appetite and financial objectives. The empirical validation of these strategies using Nippon India Growth Fund underscores their potential to yield exceptional results.

As Warren Buffet famously stated, “Investing is simple but not easy.”

This principle holds true when examining the historical performance of the Nippon Growth Fund, which endured significant corrections of up to 50% during key market events [Dot Com Burst (2001), Global Financial Crises (2008), and COVID-19 (2020) and prolonged periods of minimal returns (2000-2004, 2010-2014, and 2017-2020). Remarkably, despite these challenges, the fund has delivered an impressive annualized return of close to 21%. This echoes Buffet’s wisdom to seize opportunities amid market fluctuations, as well as his counsel to be cautious when others are exuberant and bold when others are apprehensive.

*The decision to exclude Nifty/Sensex from our backtesting analysis was predicated on our perspective that over an extended temporal scope, Midcaps are poised to exhibit superior performance in comparison to Nifty/Sensex. This assessment is grounded in the belief that Midcaps present a more favorable risk-reward proposition than both smallcap and the Sensex/Nifty index.

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MONTHLY MARKET UPDATE & OUTLOOK – JULY’23

Strong growth since liberalization (1991)

While the GDP has grown by 12 times, market capitalisation of top 100 listed companies has grown by 46 times.

Jio’s Bajaj Finance moment?

Finally, the shares of demerged Jio Financial Services (‘Jio’) have been credited to the demat accounts of the Reliance Industries shareholders and are expected to list on August 28, 2023.

Currently, Jio holds the 51st position among the stocks listed on the Nifty 50, with a demerged price of Rs. 261.85. Investors hold a sanguine outlook concerning Jio’s prospective growth trajectory, anticipating a parallel course with that of India’s prominent Non-Banking Financial Company (NBFC) – Bajaj Finance.

Bajaj Finance has recorded an impressive increase in its Assets Under Management (largely comprising loans), surpassing the threshold of Rs. 2.7 lac crore (a substantial augmentation from Rs. 1000 crore in 2006), reflecting an annual growth rate of 39%. The exponential 410-fold surge in Profits After Tax (PAT) has propelled the stock price to an astonishing ascent of 130,000% (equivalent to 1300 times) within the same period.

Jio has strategically formulated plans to disrupt the financial services sector, encompassing domains such as life and general insurance, stock broking, and asset management. It has already established a collaborative endeavor with the world’s largest asset manager, BlackRock. Investors’ optimism towards Jio can be attributed to several factors:

  1. Robust Distribution Network: Jio is poised to tap into an existing captive audience, leveraging the extensive reach of its telecom services, which cater to around 400 million users. Additionally, the annual footfall of approximately 800 million patrons at Reliance Retail stores and the integration of 2 million merchants on the JioMart grocery platform bolster its distribution prowess.

  2. Esteemed Management Team: Jio has strategically appointed eminent individuals to steer its new venture, including:

    • Mr. KV Kamath, the former Chairman of Infosys, and erstwhile Non-Executive Chairman of ICICI Bank,

    • Mr. Rajiv Mehrishi, the former Comptroller and Auditor General of India (CAG),

    • Mr. Hitesh Sethia, former Chief of McLaren Strategic Ventures.

  3. Strong Credit Rating and Access to Cost-Effective Capital: With Reliance’s backing, Jio benefits from an enviable AAA credit rating, a distinction shared by only five other prominent Non-Banking Financial Companies (NBFCs).

  4. Favorable Valuation: Jio’s possession of approximately 6% equity in Reliance Industries translates to an initial net worth exceeding Rs. 1 lakh crore. This valuation propels Jio to the position of the fifth-largest financial services entity in India, trailing closely behind established banking giants such as HDFC, SBI, ICICI, and Axis.

  5. Substantial Resources for Expansion: Reliance Industries (RIL) has seamlessly transferred Rs. 15,500 crore in cash and liquid investments to Jio, equipping it with ample resources for expansion.

The underlying opportunity that Jio seeks to seize is vividly illustrated in the chart below. Over the last quarter-century, Indians have accumulated USD 12 trillion in savings, with an anticipated additional savings of USD 103 trillion (a remarkable increase by a factor of 90) projected ahead. This landscape presents a colossal opening for NBFCs such as Jio and Bajaj Finance to capitalize upon.

Quote of the month

Successful investing is investing that lets you sleep peacefully at night.

Success is not about who makes the highest returns or who makes the most money. It is about achieving our financial goals in a timely manner with the lowest possible risk.

-Gautam Baid, The Joys of Compounding

From the global leaders:

The Indian macro dataflow has continued to exhibit resilience and strength across various key indicators:

  • Manufacturing PMI: In July 2023, the Manufacturing Purchasing Managers’ Index (PMI) registered a value of 57.7, marking a decline to a three-month low. However, it remained within the expansion zone (>50) for the 25th consecutive month. This sustained expansion was underpinned by new orders’ growth, which reached its highest level since November 2022.

  • Services PMI: The Indian Services PMI achieved an impressive milestone, reaching a 13-year high level of 62.3. This robust performance was buoyed by strong demand, both domestically and in the export sector.

  • GST Collection: July 2023 witnessed GST collections amounting to Rs. 1.65 trillion, reflecting an 11% year-on-year increase. This achievement marked the seventeenth consecutive month of collections surpassing the Rs. 1.4 trillion threshold. It follows the record-setting collections of Rs. 1.87 trillion in April 2023.

  • Credit Growth: As of July 14th, 2023, credit growth surged beyond 14% year-on-year, a notable advancement from the 12.9% year-on-year growth recorded on July 15th, 2022.

  • Inflation: The Consumer Price Index (CPI) inflation rate for June 2023 displayed a rise, marking the first increase in five months, with a value of 4.81%, up from 4.25% in May 2023. This elevation was influenced by a less favorable base and an uptick in food inflation rates (+4.49%). Notably, the rate remains situated below the upper tolerance band of 6% set by the Reserve Bank of India (RBI).

  • Foreign Exchange Reserves: India’s foreign exchange reserves experienced a decrease by $2.901 billion, settling at $593.198 billion.

  • Trade Deficit: May 2023 witnessed a decline of -22% year-on-year in Indian Merchandise Exports, which amounted to $32.97 billion. Imports also underwent a contraction of -17.5% year-on-year, reaching $53.10 billion. As a result, India’s trade deficit narrowed by 8.7%, amounting to $20.13 billion. This trade scenario was influenced by weakened global demand, leading to exports reaching an eight-month low.

Collectively, these indicators portray a dynamic economic landscape, characterized by both accomplishments and challenges, as India navigates through evolving global dynamics and domestic circumstances.

Downs are temporary, ups are permanent:

Equity Market Overview:

  • In the month of July, the BSE SENSEX exhibited a notable rise of 2.8%, a trend mirrored by various other Indian indices.

  • The BSE Mid-cap and small-cap indices notably outperformed the SENSEX, recording gains of +5.7% and +7.4%, respectively.

  • The bullish sentiment witnessed in Indian indices was partly propelled by Foreign Institutional Investor (FII) flows. FIIs continued their engagement as net buyers of Indian equities in July, although at a reduced volume of +$4.2 billion, following a previous inflow of +$5.3 billion in June.

  • Sector-wise, all segments, with the exception of consumer durables, concluded the month on a positive note. Public Sector Undertakings (PSUs), power, and realty sectors notably stood out with substantial growths of +9.3%, +9.2%, and +9%, respectively. Conversely, consumer durables experienced a marginal decline with a degrowth of -0.3%.

  • Mutual Funds’ Systematic Investment Plans (SIPs) achieved an unprecedented milestone, reaching Rs. 15,245 crore for the first time. This highlights the strong confidence Indian investors have in equities.

 

Fixed Income Landscape:

  • In its July meeting, the Monetary Policy Committee (MPC) opted to maintain all rates unchanged while retaining the stance as ‘withdrawal of accommodation.’

  • Government Securities (Gsec) yields remained within a certain range over the month, influenced mainly by global news developments. Gsec closed the month at 7.17%, a modest increase from June’s 7.11%, May’s 6.99%, and April’s 7.12%.

  • Core liquidity, which began the financial year at 0.5% of Net Demand and Time Deposits (NDTL), saw robust improvement due to factors such as RBI dividends, RBI’s intervention in forex markets, the demonetization of 2000 rupee notes, and seasonal patterns. Presently, core liquidity comfortably stands at around 2% of NDTL.

 

Market Outlook:

  • Recent updates in Indian macroeconomic data continue to showcase the economy’s resilience.

  • Supported by strong fundamentals and ongoing structural reforms, the economy is poised for a potential upswing in the long run.

  • Favorable demographics and demand dynamics contribute positively to the economic outlook.

  • While the long-term structural story remains intact, short-term volatility could arise from global growth-inflation dynamics and evolving geopolitical factors.

  • Valuations remain relatively high, and the business cycle maintains its positive momentum.

  • Considering a comprehensive analysis of the aforementioned indicators, it is deduced that the markets are currently in a “Boom” phase.

  • A positive stance is maintained for sectors aligned with the domestic economy, such as Banks, Automobiles, Capital Goods, and Manufacturing. The pharmaceutical sector also appears promising due to reasonable valuations.

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Contrarian investing: Why it pays to be different

Investing in the stock market requires a strategic approach and a thorough understanding of market trends and dynamics. One popular adage that resonates with investors worldwide is “Buy low, sell high.” This notion encapsulates the essence of investing in underperforming sectors.

Investing in underperforming sectors is often referred to as the contrarian approach. It involves taking a position opposite to prevailing market sentiment, which is usually bearish during times of sector underperformance. Contrarian investors believe that markets are not always efficient and tend to overreact to short-term events, leading to undervaluation of certain sectors or stocks.

Advantages of Investing in Underperforming Sectors

  1. Lower Entry Price: Investing in underperforming sectors allows investors to purchase stocks at lower prices. When the sector eventually rebounds, these investments can yield significant returns.

  2. Potential for High Returns: As underperforming sectors recover, stock prices have the potential to surge, providing investors with attractive gains.

  3. Reduced Downside Risk: While any investment carries inherent risks, buying into underperforming sectors at low prices can mitigate potential losses since stock prices are already discounted.

  4. Diversification Benefits: Adding underperforming sectors to an investment portfolio can enhance diversification, reducing overall portfolio risk.

  5. Long-Term Growth Opportunities: Industries experiencing temporary setbacks may have long-term growth prospects that investors can capitalize on.

Examples of successful contrarian investments in the Indian equity market:

IT Sector (2001-07):

During the dot-com bubble burst in the early 2000s, the Indian IT sector faced significant underperformance. However, contrarian investors who recognized the long-term potential of the industry were rewarded handsomely as the sector rebounded and experienced remarkable growth in subsequent years.

During 2000-01, IT sector corrected by 85% – providing a reasonable valuation to invest.

A SIP in ICICI Prudential Technology Fund (from 2001-2007) delivered an annual return of 44%.

Banking Sector (2008-10):

 

In the wake of the global financial crises, India’s banking sector faced considerable challenges. However, those who adopted a contrarian approach and invested in fundamentally strong banks witnessed substantial gains as the sector rebounded amidst economic recovery.

During 2007-08, banking sector corrected by 60% – providing a reasonable valuation to invest.

A SIP in Nippon India Banking Fund (from 2008-2010) delivered an annual return of 50%.

Auto Sector (2019-2023):

The Indian auto sector faced a slowdown during 2019-20 due to various factors, including economic slowdown, liquidity crunch, and changes in regulations. Many leading automobile companies’ stock prices experienced a significant decline. However, investors who recognized the sector’s importance in the Indian economy and its potential for recovery made strategic investments. As the economy gradually improved and consumer demand picked up, the auto sector started to rebound, leading to substantial gains for those who invested during the downturn.

During 2018-20, auto sector corrected by 60% – providing a reasonable valuation to invest.

A SIP in UTI Transportation Fund (from 2019-2023) delivered an annual return of 23.25%.

Pharmaceuticals Sector (2017-2021):

 

In 2017 & early 2018, the Indian pharmaceutical sector was under pressure due to increased scrutiny by regulatory agencies, pricing pressures in international markets, and increased competition. As a result, several pharma stocks witnessed a bearish trend, creating an opportunity for contrarian investors. Investors who had confidence in the long-term growth prospects of the Indian pharmaceutical industry and chose fundamentally strong companies with robust pipelines benefited from the sector’s eventual recovery.

 

During 2016-20, pharma sector corrected by 45% – providing a reasonable valuation to invest.

A SIP in DSP Healthcare Fund (from 2019-2021) delivered an annual return of 46%.

Smallcap funds:

Contrarian investing can be applied to funds based on market capitalization as well (Large, Mid and Small). Smallcaps performed very poorly from 2018-2020, correcting by 50-80% in some cases. In mid 2020, we recommended to invest in UTI Smallcap Fund to take the benefit of cheap valuation of smallcaps. Today, the portfolios highlight the return of the contrarian call we made.

While the contrarian approach can be rewarding, it is essential to acknowledge its inherent risks:

  1. Market Timing: Identifying the right time to invest in an underperforming sector can be challenging, as market sentiment can be unpredictable.

  2. Fundamental Analysis: Investors must conduct thorough fundamental analysis to ensure they invest in fundamentally strong companies within the underperforming sector.

  3. Patience and Long-Term View: Contrarian investments may take time to materialize (usually 2-4 years), requiring patience and a long-term investment horizon.

 
 Conclusion

 

Investing in underperforming sectors can be a prudent strategy for those willing to adopt a contrarian approach. By purchasing undervalued stocks during periods of underperformance (preferably through SIP), investors position themselves to benefit from potential future growth when the sector eventually rebounds. However, successful implementation of this strategy necessitates careful research, sound fundamental analysis, and a long-term perspective.

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MONTHLY MARKET UPDATE & OUTLOOK – JUNE’23

Financial lesson from economy of Norway

As of today, Norway boasts one of the highest GDPs per capita in the world falling only behind Switzerland & a select group of micro nations. The country has

1.    A robust trade surplus;

2.    One of the highest national life expectancies;

3.    Extremely skilled workforce

4.    A very low unemployment rate;

5.    International recognition as aplace that is very easy to do business.

However, Norway wasn’t always this prosperous. In the 1960s it was an economy mainly based on fishing with a GDP similar in size to underdeveloped countries like Bangladesh or Nigeria.

But, in May of 1963, the Norwegian government asserted sovereign rights over natural resources in areas of the North Sea and they found a lot of oil. In the mid-70s, Norway produced more oil per capita than any other country in the world and even today it is only beaten out by the UAE & Saudi Arabia.

The oil boom caused Norway’s GDP to grow over five times in the 1970s, from $12B to $65B,but this newfound wealth was not being generated through private companies like Shell, Exxon or BP but rather a publicly run and owned company. 

This meant that the profits from oil sales made the Norwegian government very rich and if they wanted, they could have easily gone on a public spending spree, building fancy cities and public infrastructure or even reducing taxes but they didn’t and even today income and business taxes in Norway are still among some of the highest in the world.

Norwegian government had the foresight to realize that oil wealth was not forever and the citizens of Norway would not be satisfied if they had to go back to fishing in a generations time so the government invested the money into a sovereign wealth fund, Norway Government Pension Fund Global. This is the largest sovereign wealth fund in the world (with $1.3 trillion Assets undermanagement) beating out China’s State Investment Corporation which is remarkable considering that China has a population 270 times larger than Norway. 

This also means that every citizen of Norway essentially has around $250,000 (INR 2.12crore) invested into a giant hedge fund. However, only the profits generated from these investments are used to fund things like education, infrastructure, hospitals etc. Recently, the fund posted $84B quarterly profit.

Norway was a country that won the oil lottery in1970s. But, the citizens of the Norway did not get to enjoy the proceeds of the lottery and every penny went towards the corpus of the fund, which further was invested in assets across the globe. Some years down the line, the country may run out of the oil resources but the impact will not be much.

As an investor, our goal in life should be similar to that of Norwegian government. In the early healthy years of our working life, we should invest aggressively, into businesses, stocks and real estate so that, in the later years, these assets provide us with a steady source of income. Many may not know but

·       78% of athletes go broke within 2 years of retirement

·       70% of lottery ticket winners go bankrupt in less than 5 years

·       60% of NBA athletes go broke within 5 years of retirement

~ It doesn’t matter how much you make. What matters is how much you keep & what you do with it~

Quote of the month

In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices risk, but it is an opportunity.

– Li Lu, founder, Himalaya Capital 

  • From the global leaders:

“To me, India is the real future,” Mark Mobius, the cofounder of Mobius Capital Partners

Indian macro dataflow remained strong:

  • Manufacturing PMI: Manufacturing PMI dropped to 57.8 in June 2023 from May’s 31-month peak of 58.7 but remained in expansion zone (>50 points) for the 24th straight month;

  • Services PMI: The Indian services PMI declined to 58.5 after reaching a 13 year high in April 2023. It remained in expansion zone (>50 points) for the 23rf straight month;

  • GST Collection: India’s gross GST revenue collection in June stood at Rs. 1,61,497 crore, registering a 12 per cent YoY rise;

  • Credit growth: Scheduled commercial banks (SCBs) reported a robust credit growth of 15.4% in FY23 compared to 9.7% in FY22. With this, India witnessed the sharpest rise in borrowings in the last eleven years;

  • Inflation: Retail inflation likely to be flat at 4.26% in June;

  • Forex: India’s foreign exchange reserves dropped by $2.901 billion to $593.198 billion.

Equities:

  • Indian equities ended the month with strong gains and NIFTY / S&P BSE Sensex closing near all-time highs. NIFTY 50 / S&P BSE Sensex ended the month ~3.5% higher.

  • Mid-cap and small-cap indices outperformed large-cap indices and were up 19.0% and 20.5%, respectively;

  • The rally was primarily driven by continued buying by FPIs, upbeat US economic data, resilient domestic economic activity, receding inflationary pressures and subdued crude oil prices.

  • Sector-wise, all sectors ended positive;

  • FPIs bought equities worth USD 6.7 billion (May 2023: USD 5.0 billion) in June 2023 and have cumulatively bought equities worth USD 13.6 billion in Q1FY24;

  • Mutual Funds SIPs touched Rs. 14,700 cr. for the first time reflecting the strong belief of Indian investors in equities. 

Fixed income:

  • MPC minutes released for its June 2023 meeting were on a hawkish side with most members cautioning against complacency towards inflation in view of the resilience in growth and emphasised bringing down the headline CPI to its target of 4% and not just within the tolerance band (2%-6%);

  • Gsec yields trended higher during the month and 10Y Gsec yield ended the month at 7.12%, up 13 bps on month on month basis;

  • Average interbank liquidity surplus increased in June 2023 driven by fall in currency in circulation on back of deposit of INR 2000 banknotes and forex purchases by RBI.

  • Outlook:

  • Global growth trend remained mixed with economic activity supported by steady improvement in services sector and tight labour markets across most major economies. While US activity remains better than expected, Eurozone, UK and China data surprised on the downside. Elevated interest rate and modest demand outlook for goods is likely to keep housing and manufacturing activity muted. Overall, global growth is expected to slow down driven by tighter financial conditions and losing consumption momentum.

  • As on June 30, 2023, NIFTY 50 was trading at ~18x FY25E price to earnings multiple. The valuation multiples have moderated from their recent peak but is at elevated levels vis-à-vis historical average

  • We remain positive on equities over the medium-to-long-term considering the resilient domestic growth outlook, robust corporate profitability and growth supportive policies. However, Accelerated monetary policy tightening, a sharp slowdown in global growth, persistent inflation, a slowdown in earnings growth and a delay in recovery in the rural sector are key near-term risks. 

We mentioned in our April’23 monthly outlook that growth/quality will outperform value in the next few months. The same is evident from the chart below and the outperformance is likely to continue for the next few months.  
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Investing in the US markets

In the last twelve years, US technology index – NASDAQ 100 has delivered 544% – almost double of Sensex (220%). Even better, if one would have invested from India, the investor would have earned a return of approx. 1,000% just because of dollar appreciation from INR 45 per dollar to INR 83 per dollar. Hence, international exposure to US stocks can not be avoided in the portfolio.

Here are the key benefits of investing in US markets (NASDAQ 100) from India:

1. Access to 100 of the largest non financial companies:

Following 10 companies by market capitalization have a weightage of 50% in NASDAQ 100:

2. Hedge against INR depreciation:

As evident from the chart below, an investor earned around 5X returns over Sensex in the last 12 years just by investing in ETFs of NASDAQ 100 from India.

3. Global exposure:

NASDAQ-100 Index comprises of companies with overseas business &  generates the bulk of their revenue from different countries.

It comprises of large multinational companies with focus on disruption.

4. High-growth & innovative large cap companies

 

NASDAQ-100 companies on an average spend 3.5x more than S&P 500 index companies for R&D. 62 companies in NASDAQ 100 in near past have filed patents across 34 key areas of disruptive technology.

5. Exposure to “new economy” sectors

NASDAQ 100 is market capitalization weighted index comprised of 100 most innovative and rapidly expanding non-financial Companies. US economy growth is shifting from capital intensive, traditional industries to the new economic sectors such as healthcare, technology and consumer. Last 10 years sales growth across industry in US large and Midcaps can be seen in Real Estate, healthcare and technology.

6. Sector and geographical diversification

However, there are certain points one should consider before investing in the US markets:

 

  1. Volatility: US markets are more volatile than Indian markets;

  2. Taxes: W.e.f. 01/04/2023, Indian government will tax foreign funds, foreign ETFs and foreign stocks at per the slab rate of investors (without the lower tax of 10% as applicable for Indian equities);

  3. Currency exchange rates can be unfavorable at times;

  4. Higher interest rates may affect the growth of companies listed in US which may be evident in lower stock returns.

  5. Since these companies generate most of their revenues across the world, a recession may affect the stock returns  in near term.

 

However, for the long run, we remain bullish on companies listed on NASDAQ 100. An investor with aggressive risk appetite or suitable investment objective (foreign children education or world tour etc.) may consider investing in the US markets. For more information, kindly connect with your respective relationship manager.

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Sleeping Elephant Is Rising

As per Maddison (2020) estimates, India’s share in the global GDP was 24% in 1700. By 1820, this number fell to 16% and by the time of independence, the number had fallen to 5%. In 250 odd years, India went from contributing a quarter of global GDP to less than 5%.

 

As India completed 75 years of independence, we witnessed much change. The Indian economy now stands as among the largest and fastest growing in the world, truly breaking free from the shackles of colonialism. The changes are not just been effected at a micro level. The big picture has not been lost in this quest as well:

  • The Insolvency & Bankruptcy Code, 2016: Not only was starting a business in India a mammoth task, but shutting one down was perhaps an even bigger one. The introduction of IBC brought the much needed clarity in the bankruptcy law.

     

  • Goods and Service Tax, 2017: considered as the most landmark reform of independent India. Prior to GST, a litany of indirect taxes exited – each requiring separate registration and filing norms. Indirect taxes varied across states and hampered interstate movement of goods. GST revenues have been above the Rs.1.4 lac crore for 12th continuous month.

     

  • Real Estate Regulatory Authority (RERA): not only protected the rights of homebuyers but also promoted the development of private enterprise by maintaining their solvency and creditworthiness.

     

  • Direct taxes: Year 2017 saw a lowered personal income tax rate, and in 2019, corporate taxes were reduced to 22% to counter underreporting of income and the black economy. The introduction of taxpayers charter, efforts to reduce litigation and use of technology have moved the system away from one of enforcement to facilitation.

     

  • Ease of doing business: When Modi government took over, India was ranked 142 in the rankings published by the World Bank. Close to 1500 old legislations were identified and scrapped. In 2020, India’s rank improved to 64 – a 79 position improvement in just 5 years.

     

  • Foreign Direct Investment: Foreign Investment Promotion Board (‘FIPB’) was abolished in 2017. Several sectors that required approval prior to investment were moved to the automatic route. For rest, individual ministries became approval authorities. India received the highest-ever FDI inflows of $ 84.8 bn in FY 22.

  • The process of registration of patents and trademarks was completely revamped and a large number of additional examiners were recruited. Compared to 2015-16, number of patents filed increased from 12,000 to 28,000 and the number of trademarks increased from 65,000 to 2.5 lacs in 2020-21.

     

  • Production Linked Incentives (PLI) schemes were introduced to boost size and scale in manufacturing. Focus shifted from providing support towards target linked output rather than input. Total production from PLI schemes is estimated to be $500 billion over the next few years. PLI schemes have potential to generate approx. 60L jobs in next few years.

     

  • Definition of MSME was revised. Micro enterprise defininition raised investment threshold to Rs. 1 crore (from Rs. 25 lacs) and adds turnover of less than Rs. 5 crore as an additional criteria. Investment threshold of Small & medium firms have been doubled.

     

  • Four labour codes – Code on Wages, 2020; the Industrial Relations Code, 2020; the Code on Social Security, 2020; and the Occupational Safety, Health & Working Conditions Code, 2020 – subsumed 29 central labour laws.

  • Infrastructure:

     

  • India has spent $14 trillion on infrastructure in the 75 years since independence. 50% of that (or $7 trillion) was spent in the last 9 years.

  • The pace of building National Highways increased from 12KM per day in 2014-15 to 37 KM per day in 2020-21.

  • Sector specific programmes such as Bharatmala (highways), sagarmala (ports), UDAN (air travel) were announced.

     

  • Close to 55% bank accounts opened in the world during 2015-18 were opened in India leveraging the simplified KYC norms.

     

  • National Payments Corporation of India – Unified Payments Interface (UPI) processed 6.8 billion transactions amounting to Rs. 51 billion in 2022.

     

  • 112 backward districts are being transformed under Aspirational Districts Programme (ADP).

     

  • In 2016, Startup India was launched. A bundle of laws were eased and income tax exemption was granted. Since then, 65,000 startups have been recognized. India’s startup ecosystem is third largest in the world.

India’s growth story will be led by the private sector, with the government playing the role of enabler and a facilitator.

 

A growth rate of 6% during 2022-47 will see Indian economy reach $16,4 trillion by 2047, a growth rate of 8% in this period will see economy reach a size of $20.6 trillion and a 10% will take economy to $32.6 trillion.

 

Source: Made in India by Amitabh Kant

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Financial Lessons From Shrimad Bhagwat Geeta

Bhagavad Gita is the divine discourse spoken by the Supreme Lord Krishna himself and is the most popular and well known of all the sacred scriptures.

 

Mahatma Gandhi once said “When doubts haunt me, when disappointments stare me in the face, and I see not one ray of hope on the horizon, I turn to Bhagavad Gita and find a verse to comfort me; and I immediately begin to smile in the midst of overwhelming sorrow. Those who meditate on the Gita will derive fresh joy and new meanings from it every day.”

 

It is an unquestionable fact that schools and colleges gives us knowledge but Bhagavad Gita gives us wisdom and even the greatest people on this planet seek wisdom in tough situations.

 

Hence, in the subsequent paragraphs, we have shared key principles from Bhagavad Gita that may benefit you in the investment journey:

    1. Control your emotions: The Bhagavad Gita teaches us that it is important to control our emotions, including fear, greed, and anger, when making investment decisions. Emotional decisions can lead to irrational choices that may negatively impact our portfolio.

       

    2. Focus on long-term goals: The Gita emphasizes the importance of focusing on the long-term, rather than short-term gains. Similarly, when investing, it is important to have a long-term investment horizon and focus on achieving your financial goals.

       

    3. Practice detachment: The Bhagavad Gita teaches us to practice detachment from the outcome of our actions. In investing, this means we should not become too attached to any particular stock or investment, and be prepared to sell it if necessary.

       

    4. Embrace uncertainty: The Gita teaches us that the only thing that is certain is uncertainty. Similarly, in investing, it is important to acknowledge that there will always be risks and uncertainties associated with investing.

       

    5. Be patient: The Bhagavad Gita emphasizes the importance of patience and perseverance. Similarly, when investing, it is important to be patient and avoid making impulsive decisions based on short-term fluctuations in the market.

       

    6. Focus on the process: The Gita teaches us to focus on the process rather than the outcome. In investing, this means focusing on a sound investment strategy and sticking to it, rather than trying to chase after quick gains.

       

    7. Seek knowledge: The Bhagavad Gita emphasizes the importance of seeking knowledge and wisdom. Similarly, in investing, it is important to educate ourselves and seek out information and insights that can help us make better investment decisions.

Onesta Capital Ventures is a Multi Family Office based out of Gurugram (India). We aim to provide tailored independent wealth management and other family governance solutions to individuals and corporates.

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