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Happy Diwali 2022! That time when we try to predict things again


A Happy and Prosperous Diwali 2022 to all of you from us at Capitalmind! Wish you all, your friends, families, colleagues and loved ones a prosperous year ahead.

This might end up being much longer than I expected. Because I’m writing with abandon, for the first part of the post. It’s been liberating to write, all through the last 17 years that this site has existed, but recently, I’ve gotten myself into a block of sorts. Writer’s block. That what I write will not be useful enough. That there are others that have written what I want to write. And maybe better. Or that age old problem of: this entire post could be a tweet. Because it could, and every post could. A lot of books could.

The thing about Diwali is that it’s a festive season celebrated differently in different parts of the country. Which is quintessentially India. We are a salad bowl. We have different things that you can see separately, and when they all come together they work. Versus a melting pot, where you put everything into a blender and everything is the same. India is the salad bowl that thrives because of its differences. Because when everything is meant to be the same, nothing is.

This is also why so many investing styles exist in India (and the world). Bad governance? Can still make you money. No debt? Excellent. Too much debt? Just as good. Buy at any price? Okay. Don’t buy at any price? Works.

Technicals, fine. Fundamentals, fine. It’s always been like that – but too many people think other styles don’t work. This Diwali, I hope we all realize that different folks will have different strokes, and all of them can win.

Virat Kohli made India’s Diwali brilliant by a superb innings in the T20 world cup. Much as his innings was excellent, it was a few amazing things that just happened in ways that you couldn’t explain.

  • We needed 28 runs in 8 balls. This sounds like near impossible, but Kohli’s two sixes – fantastic shots – took it to 16 off 6. Doable, and all of this was the batsman’s skill.
  • The last over was crazy. After the loss of a wicket, we still needed 13 runs off three balls. Again, back to near impossible.
  • Then a no-ball (above waist high) thulped for six. The free hit ball was first wide, giving another run. And then the next ball knocked the stumps down and ricocheted to no-man’s land, giving them three runs. One ball – a six, a no-ball, a wide, and three byes. This was incredible luck. Down to two from two.
  • And then, Karthik gets out stumped. Two from one, and looks ominous as Ashwin comes in.
  • The next ball is a wide. This might be skill, “induced” by Ashwin. Scores level, and India’s still got a ball to spare. Ashwin hits that ball over the top to a win.

Kohli said later: I have no words. I have no idea how we won.

That’s humility right there, acknowledging that the universe somehow came together at the right time to make this happen. The analogy in markets is: you don’t know what will happen. No one does. So what we do, is to make the best of what we get – and try to induce things to happen in our favour. You can’t depend on luck alone, but sometimes you’re going to need it. What you have to do is stick it out till the end, and great things will happen. So if you don’t do stupid things, you’ll win because other people will do stupid things.

Sounds like India today, when the world is doing stupid things. We’re almost like, hello, we’ve been there. We gave our people free money and it caused inflation. We’ve tried to borrow more than we could afford, and we saw the shit hit the fan. We use coal, thank you. We raised interest rates early so that we could arrest inflation way in advance. The west, though, seems to be like: no, this won’t hurt us, because this time is different. And it isn’t different. We might just be doing our very best, but it matters quite as much that others aren’t getting their share of luck, or are actually doing the wrong things.

In the coming year, it will be time to actually use this luck to our favour. I don’t know if we’ll also go on to doing stupid things, but there is the hope that we’ve learnt from our own past and that we will open up more.

It’s time now to predict, that once in a year thing that we do which has no significance. But it’s fun. And what’s Diwali without a little fun?

My last year’s predictions

Inflation will fall, and interest rates are likely to remain where they are. Crude price correction will drive inflation and USDINR lower.

So, so wrong here. Crude went all the way to $120, and USDINR is at 83! Inflation’s still at 7.4% which is high. Interest rates are 200 bps (2%) higher than earlier! Worst prediction ever. If it’s possible I’d do a minus five score here. But i’ll just say (0/10).

Markets will see a crash (20%+) at some point in the next year. I’ve said this for the past few years, and I think it’s quite a lot more likely in the coming year.

This is a weird one. Nearly every western market is down over 20% in the last year, with the Nasdaq down 33%. The Nifty in India went down about 18.5% so I can’t give myself full marks, but yeah, this has been a crash year.

Nifty Drop

So I’ll give myself like a 7/10 on this.

The crash will hit IPOs, which will then hit startup funding big time. While there will be big funding numbers, at least one unicorn will become popcorn.

The crash has indeed hit IPOs badly. In the US, the drought in IPOs has been over 200 days, and FT says it’s the “longest US tech IPO drought in over 20 years“. In India, there were some listings – Delhivery and Tracxn in the startup space, and LIC as a behemoth. But overall activity is down tremendously.

Startups are finding it more difficult to raise money too. There were some funding rounds that were big. Many unicorns have lost their status in subsequent (smaller) rounds, and startups like Pharmeasy and Byju’s seem to be struggling to raise at their last round valuations.

This is 10/10.

The Nifty index will switch to much more of the newer tech players (Zomato, Naukri etc.), but this could take two+ years. However, we will see at least one of these startups fall massively.

The Nifty index isn’t getting any startups soon 🙂 Zomato’s down a lot – trades at 62, below the IPO price and down 60% from the peak. Policy bazaar is at an all time low, as is Nykaa (though Nykaa is above the IPO price somewhat). Almost all startups are trading below their peak or even IPO prices. There’s hardly a chance of them getting added to the Nifty just yet (but I did say 2+ years though).

And we’ve seen them fall massively (at least one!). So, 5/10.

Crypto will become mainstream after potentially rough battles with regulators and governments. However, the process will involve forced regulation that will move a lot of things into darker webs, but the scamming will reduce overall.

Crypto’s still not mainstream. Regulators have made it tough, with a lot of crypto pieces going into investigation. India has put taxes on transactions and profits on crypto, nearly shutting down all activity in it. The big coins have fallen in a massive way, more than 65% in the year.

Crypto fall

This has reduced interest in crypto overall, and probably that’s why the scamming isn’t as much.

Given how little of this has come true, I’ll just say 2/10.

India will finally allow the rupee to become capital account convertible. Other things that can come, but I’m not yet confident: Indian bonds get added to world indexes, RBI allows bonds to be bought directly by retail and a less crazy law that will replace FEMA.

Some of this is happening. RBI allowed foreign trade settlement to happen in INR (read our post). They even allowed foreigners to buy short term government bonds (but only till Oct 31).

And RBI did indeed allow bonds to be bought directly by retail investors. (Read our post on RBI retail direct) .

There ‘s no law that replaces FEMA (yet). And Indian bonds didn’t get added to world indexes because of a number of complexities. So no go on those.

Still, on this, 8/10.

The US will talk about a taper through the entire year and actually do very little. This time, money will flow into emerging markets rather than exit them (after an initial bout of jitters).

This is wrong and wrong. There’s been not just a taper but a strong withdrawal of liquidity by the US fed. In fact the only country actively doing QE of sorts is Japan, because their country will collapse if yields go beyond 1% or 2%.

Money has flown OUT of emerging markets, for the most part. India saw over $20 bn (in fact, 180,000 cr+) of liquidity rush out, for instance.

FPI investments

So, 0/10.

The unlock trade will still result in many players in the travel and tourism space either merging or going bust. Opportunities for domestic tourism in India will flourish because international travel will continue to be painful.

Domestic tourism is rocking, indeed. Hotels are full, flights are packed, airports are struggling to breathe. International visas are taking years, so travel is still a pain (but it has improved from last year).

We’ve not seen major mergers or busts in the travel/tourism space.

So 5/10.

India will see a major social impact of not having schools open all this time, with the rich-poor divide widening, especially for kids. This could lead to a repeat-year for a lot of kids. (This year should just be repeated for all kids across India so that no one is left behind. But that’s is unlikely to be pushed through.)

I don’t even know how to evaluate this, because the impact isn’t well known. All I can say is that the social divide continues to expand, but we don’t have any data on whether this is happening or not. All we know is that kids are going back to school, and the educational system is healing, though slowly.

I won’t even rate this prediction.

The Score

The overall score is: it doesn’t matter. I should be less than 30% accurate, as all predictions tend to be over the long term. It’s better, as we say at Capitalmind, to react, not predict.

What happened really?

  • Russia attacked Ukraine. This is not something you’d predict easily. And that set a series of events in motion.
  • Crude prices spiked, as did gas prices. They have healed but not entirely.
  • Inflation spiked too, partly due to fuel prices and partly due to past imbalances by western governments giving free money to people.
  • Interest rates went up as western central banks started to hike rates. This has caused rates even in emerging economies to go up big time.
  • The dollar saw a massive increase compared to nearly all other currencies. The rupee depreciated to 83 to a dollar, but that’s still less than how much the JPY, the EUR and the GBP lost in comparison.
  • In all of this, results of many companies have improved substantially in India. Mainly because they were so bad last year. But IT companies lost their mojo, and margins in a lot of industries have come down.

There’s hardly any chance that I could have predicted any of this, mostly because I suck at it. And it’s irrational too: because after years and years of printing to oblivion, there had been no inflation, so why predict it for the coming year, I thought. So take my predictions with ample amounts of salt!

What’s for next year?

I’ll give some of my thoughts a shot.

India will still see a 20% fall in the markets, despite this as a bad year. But it will recover very fast, and mostly on domestic investor additions.

Interest rates will rise more, before tapering off towards the end of next year. The cause will be continuously higher US interest rates, which force “traditional” thought processes like keeping Indian rates high too. I expect that the 10 year will peak between 8% to 9%, but short term rates too will reach those levels. But, by the end of next year, long term rates will come off sharply.

India’s companies will see an inflation shock hit their margins, along with debt costs spiralling upwards. The best companies however will be those that have debt easily available and serviceable even at higher rates, because their competition can’t raise.

Startups will have a super-rough season. There will be corporate governance and fraud issues uncovered. There will be unicorns that go bust. Yet, we’ll see some large fund raises, as the best make it through a tough time.

Capex will come off big time, as rates rise, and companies who have massively increased capex will probably see a longer time to realizations.

Indian real estate will rise quite strongly, until interest rates cause issues with loan servicing and growth. Prices may not drop too much in the next year, but they’re likely to start to drop strongly by 2024.

Japan will struggle to finance its own debt as inflation continues to rise locally. The JPY might depreciate even more strongly, and Japan will sell USD to keep currency fluctuations at a minimum. Their markets will be great in the local currency, but horrible in any other.

Europe has enough trouble with gas and heating, but I think they will somehow make it through the winter. However European economies will be wrecked. Companies will shift manufacturing bases to other countries if they can, and demand in Europe will slow considerably. The ECB is likely to break down and drop rates even when inflation is high, because they want a recession even less than inflation.

This will mean that the Russia Ukraine hostilities will continue but at a much slower pace. They’ll remain enemies. The world will move on by the end of 2023. (I strongly think there will be no world war on this)

The US markets will muddle through the next year, with interest rates increasing rapidly as inflation rises. Eventually, even the Fed will give up and start resuming QE, but inflation will be high in terms of wages and rents. These will fall only after the Fed does a second series of interest rate hikes later next year.

China’s unpredictable for me. I think it will eventually come back to its senses, but no rationality seems to work there. So it’s going to surprise us.

India continues to be a stand out story in the longer term, and foreign investors will eventually start moving more money here. After some deep damage to markets and macro, India will free more of its economy to domestic and foreign investors. The scale of GST, UPI etc. will cause more tax rupees to be collected, keeping borrowing costs down.

The Rupee should be in the 80-85 range, and will rise at least once to the USD, below 79. We will not get into bond indexes even next year (I hope I’m wrong here).

Fixed income markets will have higher yields, as deposit rates increase. However, towards the middle of 2023, there will again be an increasing wave of NPAs, both corporate and retail.

Note that we aren’t taking action on any of these. Remember, react, don’t predict. So if these things start to happen, we’ll address them in portfolios. Don’t go around thinking: why are we buying stocks if we think markets will fall? Thinking is free. Portfolio actions are costly. So we will respond, not randomly predict. (This post is NOT for action)

What’s happening at Capitalmind?

We’ve grown. To 1000+ crores in assets at the Capitalmind Wealth PMS, and a larger amount in our advisory business. This has happened through choppy markets (down last year) and crazy macro events. Yet, we hope to see a large recovery in markets over the next few years, so much that it will make up for a few bad years like the last one.

We’ve also applied for a mutual fund AMC license, and hopefully we get a go-ahead in the next year! We want to build awesome tax-efficient and high-value-vs-cost products for you, and make investing less complicated so you have time to explore and enjoy yourself.

We will be doing a bunch of workshops across the country in the coming year. These will focus on the India story, and how the macro actually makes for great investing opportunities. More will come on Capitalmind too!

Stuff you’ll like:

The Diwali Discount!

We have a 30% discount on Capitalmind Premium, just for a short period!

Capitalmind Offer

Check out:

And yet again, wish you a very Happy Diwali!

Earlier Diwali Posts:


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