If we go by common knowledge, then high inflation is considered to be one of the worst enemies of an economy. So logically, the opposite of Inflation - Deflation, should be a boon to economy? Not quite, infact in some cases, deflation has hit countries so hard, they were printing money just so they can invite inflation (Japan).

China is going through a similar phenomenon and its again causing havoc in Indian markets. Let's start where we left our story and understand how China is affecting Indian markets, yet again.

So, as we know, the housing crisis and the Covid pandemic, both occurred around 2020, but this was coupled with already slowing GDP, politically unrest, ageing population and various other domestic factors in China. All of this led to a huge dip in Chinese consumption. Various key categories, such as EVs, textiles, durables, household electronics, transportation and most importantly housing, saw a decline in demand. This affected various industries, with big names including steel, chemicals, batteries, electrical components, automotive components etc.

This resulted in two things. Firstly, lower consumption led to a huge problem for industries which had existing over-capacity for production, who now also had to face lower demand for goods. Goods such as EV battery saw a price decrease up to 50%, while the raw material - Lithium Carbonate prices in China declined around 70%.

And secondly, it hurt the tax collection of government, who now had less money to pump in the system and revive the industrial demand.

But now let's get to the question of, how did it affect Indian companies? If we look at the commodity side, such as Steel, Chemicals and Sophisticated capital goods, you will see similar looking graphs. A huge increase in the price slope, almost like a plateau between 2021-2022 and a sudden decline around 2023.

This is because, the supply chain issues during Covid lockdowns, resulted in lack of supply of commodities and specialized equipment. The lack of supply led to increase in core goods prices. Indian companies pounced on this opportunity by increasing their exports to fill the gap in the market. Thus, revenues and profitability for Indian chemical and steel companies improved during this phase. This period also coincided with the recovery of western world and healthy foreign demand.

But post-covid, the surge in western demand had stabilized, and that's when China's manufacturing companies started pressing the gas. What also didn't help was the domestic demand, as Chinese consumption had not recovered post-covid. Thus, when China restarted its industrial production, they were catering to non-existent demand. These goods slowly found their way to global markets, and cheap Chinese exports flooded the market. The global prices of many commodities, electrical equipment, computer components etc. fell to record lows.

Even today, China is flooding cheap commodities into the global markets and is driving the prices down. This is also coupled with weak Chinese yuan which is also elevating the pressure. One might think, a situation like this may seem bad for chemical and steel companies but should be a blessing for companies manufacturing final goods and sourcing raw material from China. Well to some extent yes, but the problem is, China has a good backward integration setup. So they are not only flooding cheap OEM parts, and commodities, but also exporting lower priced final products such as electronics and automobile. Thus, companies in Germany and other parts of Europe are facing stiff price competition in automobile segment.

All this chaos has been because of a deflationary cycle in one country, which shows the important part a country like China plays in the global economy. Many countries have opted for dumping duties against China, giving a breather to domestic players. Indian government also went ahead with a detailed list of anti-duty items which included things such as metals, tiles, specialized machineries, construction equipment, solar cell materials, certain chemicals and various other items. As far as India is concerned, thanks to our GDP growth, domestic consumption and good supply capacity, we are able to fight the current deflationary cycle in China.

So, what now? We expect China's deflationary outlook to continue for this year, until there is a major policy shift. To improve the situation, government will have to increase the domestic consumption by increasing the household income. The housing crisis mess also needs to be cleared for a swift revival in the economy. Till then, the global markets will be in pressure. The global core goods inflation is already sliding down, thanks to the over-supply from China and devaluation of yuan.

If you liked this article, please consider subscribing to our newsletter to read more such insightful pieces directly in your inbox.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplaceable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves, but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

So, continuing where we left, thanks to the covid lockdown, China had significantly decreased its industrial activities. The consumption in China was also down drastically during the housing crisis and pandemic. This is also visible in the inflation numbers, which had cooled down post January 2020, because of low economic activity. The world's factory was facing a heatstroke, but the question is, what were its effect on other countries and more importantly, how did it affect India?

(The fall in 2020 represents the start of crisis and slowdown in Chinese economy)

In the beginning, the pressure of Chinese lockdown was felt on commodities throughout the globe. As the mining and industrial activity in China were at record low, prices of chemicals, lithium, steel etc. all shot up. Alongside, prices of capital goods such as manufacturing parts, computer equipment, telecommunication equipment and semiconductor all soared, as China was one of the biggest exporters of these products.

For common man like us, it means prices of finished goods were bound to increase. In some cases, the increase in price was absorbed by companies and consumer both, but in many cases Indian consumers had to face most of the brunt of higher raw material prices. India is a key importer of electrical, computer and telecom equipment from China. In commodities, India imports majority of chemicals, polymers and fertilizers from China. So naturally, a supply side shock in these goods would hugely impact the prices of final good.

This supply constraint phenomenon was observed in India in 2021 and 2022. Due to these factors, consumer durables in India such as AC, TV, Fridge, witnessed high inflation. White Goods such as these, source roughly 35-40% of their components from China, while ACs get roughly 75% of the material from the eastern neighbor. The price increase even though was visible to the consumers, the impact on gross margins of various consumer durable companies were even more severe.

While Indian Consumer Durable companies were suffering with increased cost of raw materials, Indian steel, Chemical and other commodity companies were having the time of their life.

What Happened to Steel Sector in India?

China is the largest producer of steel with roughly 54% of world steel production. The next biggest producer is India with 7.5% of global production. China consumes roughly 90% of the entire steel it produces and exports rest 10%, which is still 5.4% of annual steel supply.

Due to lower steel production in 2020 - 2022, China's export saw a marginal dip. But the timing of export dip coincided with the post-covid recovery of the western world. Which means the steel demand increased in Europe and US, while the exports and production decreased from China's side. And so, our home teams from Indian steel sector tried to fill the gap.

This resulted in a huge jump in steel prices in India as Indian steel players were exporting steel for higher prices to western regions. This prompted government to bring in export tariff for steel exports, so these companies would first cater the national demand, and then someone else's.

What Happened to Chemical Sector in India?

A similar trend was seen in the chemical sector as well, but understanding the chemical sector and that too of China is slightly more tedious. China's chemical export dipped in 2020-2022, because of supply chain constraint. The throughput of top ports saw a decline, the production was halted due to lockdown and China also imposed various pollution norms on chemical industries, all of these reasons decreased the total output of chemical production.

Indian chemical companies, who were already on a bull run with increasing capacity, saw a huge gap and jumped to grab the opportunity. The prices of things such as petrochemicals, alkyl-based chemicals, battery-based chemicals and other specialty chemical's prices shot up. The margins improved slightly, but given the increase in volume, Indian companies saw a good jump in profitability.

But the party has to stop somewhere, and so it did. China started opening up in early 2023, the industrial activities were coming to pre-covid level and shops were opening their shutters. But there was one small problem. The CPI inflation in China was nowhere near other countries, infact, while the rest of the world was battling high inflation, China's CPI was heading downwards (see above chart), indicating a deflation in the economy. The events that followed next, is what we are experiencing today. Stay tuned for next article to read about the deflationary cycle of China.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplaceable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves, but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

The Indian diaspora, one of the largest in the world, consists of millions living outside India. Among these individuals, distinctions are made based on their residency status and connection to India, primarily categorized into Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCI). Understanding the differences between these statuses is crucial for people of Indian heritage living abroad as it affects their rights, benefits, and financial planning needs in India. This article aims to clarify these distinctions, providing a comprehensive comparison to help individuals identify their category and understand the associated benefits and limitations.

Non-Resident Indians (NRIs)

A Non-Resident Indian (NRI) is an Indian citizen who resides outside India for purposes of employment, business, or vocation, indicating a temporary intent of staying abroad. The criteria for being considered an NRI is staying outside of India for more than 182 days in the given financial year. NRIs hold an Indian passport and have the right to vote in Indian elections, access to Indian bank accounts albeit NRO, NRE, FCNR only, and can invest in Indian properties and securities with certain restrictions. NRIs however are not allowed to hold public office or purchase agricultural land.

Example 1: An Indian citizen departing to the UK on 3rd Dec 2018 to take up a job will not be considered as a NRI for that Financial Year as the citizen stayed more than 182 days in India (starting 1st April 2018).

Example 2: An Indian citizen departing to the UK on 5th April 2018 to take up a job and not returning to India (even for family visits) for more than 182 days in that financial year will be considered as an NRI.

NRIs often maintain strong economic and cultural ties with India, contributing significantly to the country through remittances and investments. They enjoy several financial privileges, such as non-taxable Indian income and special banking facilities, which are designed to encourage investment back into India.

Fun Fact: The inward remittances rose 12.3% to $125 billion in 2023 and accounts to 3.4% of the Indian GDP. Source: Business Standard

Persons of Indian Origin (PIOs)

The Persons of Indian Origin (PIO) card was a form of identification issued to individuals who were of Indian origin up to four generations removed but were not Indian citizens. This included people who had migrated from India and obtained citizenship of other countries. The PIO card provided several benefits, such as visa-free travel to India, rights to own property in India, and to work in India, among others.

However, in January 2015, the PIO card scheme was merged with the Overseas Citizenship of India (OCI) program to simplify the rules and provide a uniform status to the Indian diaspora. Prior to this merger, PIO cardholders had some limitations compared to OCI cardholders, such as the duration of stay in India and eligibility for certain types of employment.

The transition to OCI has provided former PIO cardholders with enhanced benefits, including lifelong visa-free entry to India and the right to work, study, and engage in business activities in India, mirroring those previously only available to OCI cardholders. This move has been widely appreciated by the Indian diaspora for simplifying the legal framework and making it more beneficial for people of Indian origin living abroad.

Overseas Citizenship of India (OCI)

As mentioned in the PIO segment, The Overseas Citizenship of India (OCI) scheme offers a long-term visa status to people of Indian origin and their spouses, allowing them to live and work in India indefinitely. Unlike the PIO scheme it replaced, the OCI card provides a more comprehensive set of benefits, making it akin to dual citizenship, although India does not officially allow dual citizenship. Eligibility for OCI status extends to people who were once Indian citizens, their children, and grandchildren, as well as to spouses of current Indian citizens or OCIs.

OCI benefits include a multipurpose, lifelong visa to visit, live, and work in India, exemption from registering with local police authorities for any length of stay, the right to own non-agricultural property, and the ability to apply for Indian driver's licenses, PAN cards, and other IDs. OCI cardholders, however, cannot vote, hold elected office, work in government jobs, or purchase agricultural land.

The introduction of OCI has significantly simplified the legal and bureaucratic processes for the Indian diaspora, encouraging deeper connections with India. It represents India's commitment to maintaining a strong relationship with its global community, offering a blend of benefits that encourage cultural, economic, and social engagement with the country.

Key Differences and Considerations

• NRIs are Indian citizens residing abroad, retaining full citizenship rights, including voting, but with restrictions on property purchase.

• PIOs were individuals of Indian origin who had migrated and acquired foreign citizenship, eligible for certain rights in India. This category is now subsumed under OCI.

• OCIs are foreign citizens of Indian origin granted several rights similar to Indian citizens, except for political rights and the purchase of agricultural land.

Conclusion

Distinguishing between NRI, PIO, and OCI statuses is crucial for individuals of Indian heritage living abroad to understand their rights, benefits, and obligations toward India. With the merger of PIO and OCI, the process has been streamlined, offering a comprehensive set of benefits to overseas Indians. Whether it's participating in the economic growth of India, maintaining cultural ties, or enjoying the ease of travel and residence, each status offers unique advantages tailored to the needs of the global Indian diaspora. Choosing the right status is an important decision that affects an individual's engagement with their homeland.

You will also realize that these statuses differ how you deal with financial intermediaries or services in India. Financial Planning is a behind the mind of every individual sooner or later. Hopefully this article, helps you in making sense of different statuses for now.

We have launched a new community for NRIs on WhatsApp where we help you solve all your queries with help of our wealth managers and sister tax office (SGCO & Co. LLP). You can join it by clicking on the button at the start of the article.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplaceable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves, but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

As you would have guessed by now, this series of articles are based on the eastern superpower China. We have split the entire buffet into 3 parts, where we try to breakdown the different market cycle witnessed in India and global markets due to the Chinese economic instability. In this piece we will cover the great housing-crisis in China, which resulted in a 2008 like economic meltdown. In the 2nd half we will cover the inflationary cycle in India and International markets to understand how Chinese meltdown affected consumers like us globally. And lastly, we will cover the current situation, where a price-war has erupted in the global markets. An internally wounded China is flexing its muscles by flooding the markets with cheap goods and commodities. With this series we hope the readers will get an understanding of how the broader markets have behaved in the background, while we were sipping on our tea and complaining about high inflation.

The tale of the current crisis in China starts with our old friend real-estate. The story actually starts when some people from rural China wanted to increase their income and decided to migrate to cities. By some people we mean roughly 290 million migrants between 1978 to 2019. This made real estate companies feel like they are in a gold rush, as the demand for residential real estate was soaring.

Throughout 2000s, China witnessed huge increase in property rates, as the volume of units sold was increasing quite rapidly. Real-estate also seemed like a more attractive investment option, compared to equities, bonds and bank FDs. This was evident by the fact that in early 2000s, people kept roughly 80% of their entire wealth in real-estate.

Government also promoted real-estate investment because of the high multiplier effect. Many industries benefitted directly from this exponential rise, such as cement, steel, consumer durables, electrical and water works etc. This also led to increase in employment and had a huge impact on the GDP of China. Pre-covid, real estate contributed on an average 30% to China's GDP. For comparison, in India the real-estate contribution is only 7.3% and in US it's 16%.

But to finance such rapid expansion, with 1000s of project being launched every year, real estate companies had to resort to heavy borrowing. Companies such as Evergrande were piling up inventory, by overestimating the residential demand. These companies were able to do it either by refinancing debt or over-leveraging their books by using their under-construction projects as securities against borrowing. Even if various projects were completely unsold, real-estate companies would start new projects and would raise new capital. This can also be seen in the numbers - Currently, a total of 7.2 million units are unsold in China and according to some government officials, even the population of 1.4 billion will not be able to completely fill the vacant homes.

The debt raising activities by Chinese real estate companies also saw huge growth throughout 2000s and 2010s. Unsold inventory coupled with large debt on books, resulted in cash-flows issues, thus many under-construction projects were left incomplete. If we look at the number, we can see how over-leveraged the books of real-estate companies were throughout the cycle.

This problem was noticed by the Chinese government, who came a bit too late to the scene. To control real-estate companies' books, Chinese government launched 3-red-line policy. Essentially, the policy sets a certain limit for debt-to-equity, debt-to-cash and debt-to-asset ratio, and all the real-estate companies have to stay within this limit. And lo and behold, the top 30 real estate companies in China breached atleast 2 of these 3 limits. This forced them to decrease their debt, but also prevented them to refinance their older debts which are soon to mature.

No refinancing, coupled with large debt, unsold projects and overestimated demand, the house of cards crumbled in 2020, when one of the biggest real estate companies in China - Evergrande, defaulted on a bond repayment. The company, even though was stuck in a debt trap, was considered "too big to fail", and we all know how that title plays outs. This started one of the biggest housing crisis in China. A term which became famous during the crisis was "Ghost town", where acres of developed properties were unsold and left abandoned by builders.

There was a domino effect of this housing crisis. Nearly 40% of all the loans given out by Chinese banks were property related, including loans given to builders and property owners. Companies started defaulting on their payments as there was no cashflow from sale of property, and homeowners started defaulting as their properties was un-finished and under construction. Developers also defaulted on supplier payments, wages and land rights fee to government. Thus, a systemic crisis erupted where -

• Millions of people lost their jobs and many businesses shut shops.

• One of the biggest sources of revenue for government - Land rights revenue, saw a decline, thus less public spending.

• A sector which contributed the largest to GDP was left handicapped, which would affect both demand and supply in the economy.

This housing crisis, which was one of the biggest financial meltdowns in Chinese history, was during the peak of Covid-19 pandemic, and Chinese government had announced a lockdown. What came next was one the most volatile period of market cycle for commodities, OEMs, equipment manufacturers and food products. This is it for this article, but stay tuned for to understand, how China shutting its shop affected the global economy.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplaceable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves, but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

The power sector in India is quite a weird story, and this is also visible in the numbers. On an average, a person in India consumes 1300 Units (KwH) of electricity per year, which is significantly less when compared to countries such as Iceland where per capita consumption is 54,000 Units, United States where it is 13,000 Units and China which consumes 6,100 Units.

Many think, the reason for low consumption is because of low Purchasing Power of India, lower GDP than other countries and overall, a low economic activity when compared to other nations. These are obviously a contributor for low electricity consumption, but in reality, India has always been a power deficit country. Up until 2019, India's power deficit, on average has been around 10-15%! Which means, even if we did ramp up the consumption, there would have been no supply.

Source: Ministry of Power and PRS Research

But is this the whole truth? The PLF numbers seem to tell a different story. Plant Load Factor or PLF indicates how much power is generated out of the total installed capacity of a Power unit. In an ideal world, If the demand for power is outstripping the supply, the PLF should be touching 100%, which means power generating companies are operating at full capacity. But in India, where most houses are facing energy deficit, the average PLF for past 10 years is around 61%. Which means power companies are utilizing only 61% of the actual capacity.

Source: Ministry of Power and PRS Research

The PLF and Deficit numbers are contradictory in nature, and so the natural question is why? Let's use a checklist to see which factor seems to satisfy this anomaly the best.

• The first reason could be availability of raw materials. Power generation companies (Excluding renewable sources) need materials such as coal, lignite etc. to generate electricity. In thermal energy, roughly 87% of the energy is produced via coal, rest is through gas (LPG, CNG) and lignite (Brown coal).

  According to Coal Authority of India (CIL), they have been supplying coal to power station assuming a PLF of 85%. But the distribution of coal is highly unequal, and thermal plants with lack of resources and proper cash flows, are unable to source coal for power generation. This pushes them into a vicious cycle of idleness.

• 

  Another reason for decrease in PLF for thermal energy can be the alternate sources of energy which are coming up. For example, solar energy in India has increased at an astounding rate. The low cost and very low gestation period of solar plant, questions the economic viability of the power plant. Also, If we look at the energy mix, this could definitely be one of the reasons for decrease in PLF.

(Data taken from Ministry of Power and Presentation by Medium)

• Another reason for low PLF can be the stressed assets. As we discussed, even with proper infrastructure and profitability, lack of cash-flows for sustained period of time, can result in maintenance problems, lack of raw material and expansion issues. As of 2018, 34 Thermal power plants in India were declared as stressed asset with a total debt of ₹1,60,000 Cr. This situation has improved significantly in past 6 years, as 26 of these assets have been resolved fully or partially resolved, and other 11 are being sold to strategic buyers. All of this has been possible because of increasing power demand, government policies and investor interest in this space.

• And lastly, let's talk about transmission and distribution (T&D) - One of the biggest chokepoints for power sector. In India, T&D process goes something like this; Distribution Companies (DISCOMs) buy power from power generation companies and pass it on consumers. For this, they enter into long power purchasing agreement (PPA) with power companies to supply certain Megawatts of power for next 5-10-20 years. But there is another market, which is the short-term power market, one run by hidden giants such as Indian Energy Exchange (IEX) and Power Trading Corporation (PTC). When the domestic demand for power outstrips supply, the DISCOMs go to IEX or PTC to buy the additional power. These are short term transactions, but these transactions keep the lights on in our house. The power companies with short-term excess of electricity sell the residual on PTC, which is then bought by these DISCOMs.

• In India, DISCOMs are mostly state run, with the exception of some private ones in Mumbai and Delhi. The DISCOMs have historically been in huge debt and have been running losses for decades. Remember our Kejriwal story, when state government offer free electricity, or reduce electricity rates, it's the DISCOMs that face the losses. The state governments thus have to compensate the DISCOMs out of their own pocket. This is where the issue starts brewing; state government have kept their bills unpaid for decades. Even for expansion or major maintenance, state governments push DISCOMs to take debt. This made most of the DISCOMs in India debt-ridden, with huge issues in profitability and cash-flows. As of 2022, Indian DISCOMs of 15 states had a total debt of ₹3.6 Lakhs Cr. This was addressed by the national UDAY policy, which instructed state government to take on 75% (₹2.3 Lakhs Crore) of this debt on their books.

• 

  In such dire situations, DISCOMs find it difficult to get into long term PPAs with power generation companies and are unable to buy power in short-term markets to fulfill deficits. This results in frequent power cuts and un-catered demand. But this in turn also effects power generation companies, who have the capacity to fulfill the demand, but remain idle as there is no DISCOM to sell the power to. This is one of the key reasons for high PLF along with power deficit in India.

• And now let's cover a small subject of transmission. Companies such as PowerGrid India run one of the world's largest transmission lines through inter and cross-state networks. These transmission networks include power grids and wires which help in transferring electricity from power generation companies to DISCOMs and from DISCOMs to households. Transmission companies help transfer power from resource rich areas to area with higher demand. If we look at the numbers, in India, transmission network has increased at roughly 4% CAGR from 2007-2018, which is much slower than the expansion in population and power generation. The transmission network penetration is also quite low, and there are several bottlenecks and quality issues. These problems result in something known as Aggregate Technical and Commercial (AT&C) losses. This represents the loss in power due to technical issues such as overload system, heat etc. and non-technical issues such as pilferage and theft.

AT&C loss in India is one of the highest in the world.

• Another problem with the power sector is actually a domestic issue. The metering problem. For a long time, most homes did not have a meter in home. This made it difficult for DISCOMs to compute how much electricity bill to charge the consumers. For example, in Bihar, until recently, villages were still charged a fixed nominal rate for electricity, regardless of how much they consumed. In India, cities like Mumbai and Delhi have 70%-meter penetration, while villages in the country have around 10% penetration. And given that 66% of Indian population comes under this 10% penetration, the collection from these areas for DISCOMs are minimal. These losses are again shown in the books of DISCOMs which are not fully compensated by the states.

All of the above stated problems have plagued the industry for decades and have disabled the power sector through core. Even if the power consumption were to increase today, we have enough power generation capacity to fulfill the demand. But the transmission & distribution network, and DISCOM's balance sheet won't support the excess power supply.

These problems are slowly being fixed, via government policies and investor interest in this area. Policies such as UDAY or the national transmission extension plans, have started cleaning up this sector to make it more efficient. And it was about time; the EV revolution, increasing purchasing power and GDP growth is likely to double the power consumption by 2030. To support such a demand, we will require all components of power sector to support the system.

The current electricity capacity of India is around 420 GW (4.2 Lakhs MW), which includes fossil (57%) and non-fossil (43%) based power generation. The government is planning to expand the capacity to 500 GW just for non-fossil power generation and 1000 GW in total. The current transmission network in India is around 4.25 Lakh Km, government is planning to spend around ₹70,000Cr to add another 25,000 Km by 2025.

All of this should give a new hope of light for the power sector, and hopefully improve the condition of our transmission networks and DISCOMs.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplaceable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves, but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

The uncertainty surrounding a possible change at the centre worries investors: Could such a change trigger market instability or even a collapse? Naturally, investors wonder whether it's prudent to hold their investments until after the election outcomes.

Looking back over the past 20 years, a consistent pattern emerges— markets react to how investors feel, swinging between hope and fear. Historical data shows times when election results caused both positive and negative market reactions, showing how important investor sentiment is.

Before exploring possible scenarios, it's important to look at how markets reacted to different government changes and if waiting to see the outcomes is advisable.

A) 2004 General Elections: Hope for continuance vs. Fear of Change

Expectations were high for the return of the BJP-led government under Mr Atal Bihari Vajpayee due to a robust "India Shining" campaign. However, the Congress-led UPA emerged victorious, triggering a negative market response, with the Nifty 50 index plummeting by 12.17% in the month following the results. However, the markets recovered in the subsequent year on the back of strong Economic data.

B) 2009 General Elections: Hoping for Continuity, Fear of Change

The markets hoped for continuity as the previous years were marked with rapid Economic progress, and as UPA emerged to victory with more seats than expected and a stronger coalition, the markets rallied following the election, witnessing a 23% surge in the Nifty Index within a month.

C) 2014 General Elections: Hoping for Change, Fear of Continuity

During UPA’s 2^nd term anti-incumbency sentiment was high because of the 2G scam, coal scam etc, the perception was strongly against the government and anticipation swirled around Mr Narendra Modi and the BJP's potential ascent. Market dynamics had already factored in this outcome, with the Nifty index rising nearly 19% in the six months before the election. Post-results, the rally persisted, with the index delivering a 4.6% return within a month.

In most cases listed above, the market reaction to election outcomes, whether aligning with general investor sentiment or not, typically proves temporary. Long-term market performance is more significantly influenced by macroeconomic factors such as GDP growth, inflation rates, interest rates, corporate profitability, and government policy decisions.

For instance, following the 2004 elections' initial 12% downturn, the markets rebounded with a 15.8% return within the year and a substantial 39% return if we consider a 1-year period post this downturn. This recovery was driven by India's robust economic growth (with real GDP ranging between 7% to 8%) and supportive government policies aiding local businesses.

What might transpire after the 2024 general elections? To understand this, let’s examine India’s current position:

1. Market volatility is currently at historical lows (12-13% range), indicating investors' minimal perception of significant market risks. Bullish sentiments prevail, with more buyers than sellers looking to either hold onto their investments or expand their portfolios. Generally, these periods are short in nature as even the bad-quality stocks deliver good returns.

1. The GDP reflects a robust recovery post-COVID, buoyed by a healthy and swift economic revival. The economy's formalization, facilitated by UPI, digital payments, and GST implementation, has had a positive impact. The resilient domestic consumption has supported the India growth story.

   India’s Real GDP is expected to grow at 6.5% in FY24 as projected by RBI and India is currently amongst the fastest-growing major economies of the world.

Exhibit 2: Real GDP growth rate

1. Manufacturing is gaining traction, seen through expanding manufacturing PMI, signalling favourable growth prospects. The government’s 14 Production-linked incentive schemes with an incentive outlay of ₹ 1.97 lakh crore further bolster the industry. As can be seen in the graph below the Manufacturing PMI has been above the 50 mark that separates growth from contraction.

Exhibit 3: India Manufacturing PMI

1. With inflation within the RBI range of 2%-6% and stable interest rates (although slightly at the higher levels because of alignment with global central bank responses, considering India’s import dependence), the environment looks conducive to driving further growth in the economy, unlike global counterparts.

   Going forward we expect inflation to be around the RBI’s target of 4% in the medium term considering moderate commodity prices and ease in food inflation as the effect of erratic monsoon is receding.

Exhibit 4: CPI Chart

1. Corporate profits are rising thanks to robust consumption demand, increased government spending, and improved policy measures supporting manufacturing growth. Net profits as a % of GDP are at 4.9% (E), the highest after 2008, and expected to rise further due to the current low leverage of Indian corporates and improving business prospects.

Exhibit 5: Profit Surge Analysis

Looking ahead to the 2024 general elections, investors may ponder the market impact. However, regardless of whether the incumbent government secures another term, or a new administration takes charge, India's long-term structural growth story remains intact with strong momentum in its favor. The foundations of the Indian economy—GDP growth, inflation management, interest rates, corporate profitability, and government policies—continue to shape its growth trajectory. Hence, market performance hinges more on these enduring fundamentals than temporary political changes.

If unforeseen election results cause temporary market turbulence, savvy investors might view it differently. Such downturns could offer opportunities to buy quality assets at reduced prices, setting portfolios up for long-term growth.

India's resilient economy, coupled with its sustained growth drivers, suggests that short-term market fluctuations are likely to fade against the broader trend of long-term growth. Therefore, investors can maintain optimism about substantial market returns over time, particularly by adopting a prudent, long-term investment approach and seizing opportunities arising from short-term market volatility.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplacable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

Did you Pass Or Fail?

If you successfully passed this test, you're part of the fortunate 10% with a strong grasp of your financial assets, and you might consider skipping further reading. However, if you can't recall your investments, it's a warning sign – after all, if you can't remember what you own, how can you effectively manage and monitor them? This could be a significant concern, especially if you lack a financial advisor. But fear not, we'll explore the reasons your investments might be in a slumber and offer solutions to help you reawaken your dormant portfolio. Continue reading to discover how to make your investments work for you.

Investment Insomnia: Loss Aversion

Short-term investing is a strategy that many pursue, hoping to capitalise on market fluctuations. However, what often occurs is quite the opposite. When the stocks bought for the short term start plummeting in value, investors often freeze.

Ranbeer got a hot tip about Delta Corp, a company in the casino business when its shares were at 200 Rs. He hesitated and missed the boat. When the price went up to 300 Rs, he panicked about missing out and bought 1000 shares, but then the government dropped new rules, and the stock fell 10%. He promised himself he'd sell when it broke even, but instead, the stock took a nosedive, down 40%, taking more than half of his money. Ranbeer's story is a reminder that playing in the market without a clear plan can be a real rollercoaster and I am sure that you might have also faced this once in your lifetime.

The fear of realising a loss is a powerful psychological barrier, and it leads to the phenomenon known as "loss aversion." Loss aversion is a cognitive bias that compels individuals to strongly prefer avoiding losses over acquiring equivalent gains. When a stock bought for a quick profit starts declining, investors grapple with the fear of losing money. This fear can be paralysing, and it often leads to inaction – they keep holding onto the lost investment, hoping it will recover. As time goes by, these sidelined, losing stocks become dormant in your portfolio, effectively putting your investment strategy to sleep. The portfolio stagnates, while other opportunities may be passing you by. Your investments are no longer working for you; they're merely taking up space.

The above graph illustrates a crucial point: when your investments decline in value, you'll need to make even greater gains to recover. For example, if your investments drop by 50%, you won't break even with a 50% increase; you'd need a 100% uptick in your portfolio to get back to where you started. This underscores the importance of cutting losses early and not succumbing to the trap of loss aversion.

Are your investments snoring? ( Diversification drowsiness )

Apart from the loss aversion bias another common mistake investor make is neglecting the smaller allocations in their portfolio. People tend to focus on their major investments, often leaving the smaller positions unattended. Hrithik had put his money into a whopping 236 different stocks. But here's the catch: over 200 of them were like tiny drops in a big ocean, making up less than 1% each. The movement of any individual stocks wouldn’t be material enough to move the portfolio. It was like trying to keep track of a jumble of puzzle pieces.

These smaller investments when clubbed together would have a significant impact on your portfolio and may be the reason for your portfolio’s underperformance. Therefore, it’s very crucial to keep track of your entire portfolio right from the highest allocation investment to the lowest allocation investment. Well, tracking 50 stocks at a time is not a cup of tea for all retail investors, that’s why you should get help from financial advisors who can easily help with their professional expertise.

Sleepwalking Through Investments: The Perils of Non-Monitoring

Consider Shah Rukh, a busy professional, who once adopted an investment strategy without diligent oversight. He had a diverse portfolio of mutual funds, ranging from well-established equity funds to global market funds. As he got more delved into his work commitments, he didn’t get much time to monitor his investments. Fast forward a few years and one of his global funds turned out to be a significant laggard returning only 6% returns in 10 years’ time way underperforming the benchmark which gave 13% returns. Shah Rukh's experience underscores the risks of neglecting monitoring in the realm of investments, where a lack of vigilance can lead to unexpected financial setbacks. Failing to conduct regular checks and updates can result in missed opportunities, unforeseen losses, and a diminished ability to shape your financial future. This scenario underscores the importance of active monitoring and involvement in the world of investments.

Returns as of 31^st Oct 2023

It’s time to rouse your investments from their slumber. Here are a few steps to consider:

• Schedule routine check-ins with your investments. Assess their performance and relevance to your financial goals. Are they still aligned with your objectives?

• Recognize the power of loss aversion and confront it. Sometimes, it's better to cut your losses and reallocate your resources to more promising opportunities. Remember, losses are part of investing, and avoiding them altogether is unrealistic.

• Ensure your portfolio is diversified to spread risk. Selling losing investments might free up capital for better opportunities, or it could be reinvested in a diversified portfolio.

• If managing your investments feels overwhelming, consider consulting a financial advisor. They can provide valuable insights and help you create a strategy that works for you.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplacable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.

Let's zero in on the mutual funds sector, where there exist over 500 Equity Funds in the country from about 47 mutual fund houses. Notably, both investors and research agencies frequently base their decisions on historical data. Agencies like ValueResearch assess long-term parameters and assign star ratings to funds.

However, it's vital to consider the cautionary phrase often found in investment communications: "Past performance is not an indicator of future performance." Have you ever stopped to reflect on the reasons behind this? Allow me to explain with an illustrative example:

Example 1

Consider this data comparing the performance of large-cap funds over two distinct three-year periods. The top performers during the initial evaluation period did not sustain their success in the subsequent performance period. In fact, the top performer from the evaluation phase ended up at the bottom during the subsequent three years. This data reveals that making investment decisions solely based on historical returns may not be the wisest approach. Even within the same investment category, substantial disparities in fund performance are evident. This raises a critical question: why does this happen? If past performance isn't the ideal metric, how should one choose a fund?

Pitfalls of Chasing Winners

Exhibit 1: Fund Return - Large Caps

Source: Ace Mutual Funds

Before delving into that question, let's explore the significant variations in performance across different funds. We analysed all the Large Cap mutual funds, focusing on their 1-year returns. Remarkably, these funds invest in the Top 100 companies by market capitalization – firms most of us can easily name.

Exhibit 2: Large Cap Universe - Last 1 Year

Source: Ace Mutual Funds

The table underscores the striking differences in performance among these funds. If you happen to select a fund that ends up at the bottom, the disparities are too substantial to ignore.

The "Recency Bias" isn't confined to mutual funds; it permeates various investment decisions, including equity shares for both short and long-term investments. This cognitive bias is one of the most prevalent in behavioural finance, where recent events significantly sway investment choices. For instance, positive market trends boost confidence and investment, while negative trends elicit fear, causing many investors to buy during bullish phases.

Example 2

The chart below vividly illustrates how retail investors are often ensnared by the "Temptation of Past Performance”. In 2022, Adani stocks experienced a meteoric rise, luring retail investors with promises of continued success. Sadly, this euphoria was short-lived, and investors faced substantial losses. This narrative serves as a reminder that relying solely on past performance is perilous.

Exhibit 3: Adani Green-Retail Investors Trapped by Volume and Price Data

Source: TradingView

FOMO (Fear of Missing Out) investing is when people make money choices because they're scared of missing out on good chances in the financial world. They might follow the crowd and invest in trendy things even if it doesn't make sense for their usual plans. This is like recency bias, where folks pay too much attention to what's happening right now and ignore the past. They both can lead to hasty decisions and risks because you don't think about the long-term picture, and that's not always good for your money.

Exhibit4: IPO Table - Biggest IPOs in last 2 years since performance since listing

Source: Bloomberg, SEBI

This underscores the paramount importance of a well-informed fund selection process. Instead of relying solely on past performance, a comprehensive fundamental analysis is imperative, considering factors beyond historical returns, for a prudent and diversified investment approach. While it's undeniable that a fund's performance track record provides valuable insights, it is only one piece of the puzzle. Selecting a mutual fund scheme necessitates a deeper understanding, considering factors such as:

• Fund's portfolio composition

• Track record of the fund manager

• Investment processes

• Fund Size

• Portfolio Turnover

• Sector and Stock weightings

• Risk Assumptions

• Diversification.

Investing is a complex journey. It necessitates time, effort, and skill. So, is it worth the risk? Many affluent investors rely on expert advice. While you may not be wealthy yet, smart choices can expedite your path to wealth.

Effective wealth management is an iterative process, not a one-time decision. Successful monitoring of your mutual funds is crucial. This doesn't mean reacting to every short-term fluctuation, but rather understanding the source of performance. Investing demands more profound analysis than merely glancing at past returns.

In conclusion, investing requires a comprehensive analysis, looking beyond the allure of past performance. To make informed choices and address the ever-changing market dynamics, professional guidance becomes paramount.

Ladderup Wealth since 2011 has broken the ranks and established itself as one of the most premier wealth management firms in the country. Your wealth is irreplacable and you have acquired it after decades of hard work. It is important that it is constantly monitored and nurtured with the right approach. You might not have the right time/skills to do it yourselves but we can help you on that journey. Improper and incompetent advice can have long term side effects on your wealth, so please choose wisely. Get in touch with us via our website today.