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Deepak's Memos

Happy Diwali 2023! Of Lights, Delights and Silly Predictions


A Happy and Prosperous Diwali 2023 to you from all of us at Capitalmind! Wish you all, your friends, families, colleagues and loved ones a prosperous year ahead.

Diwali is really about the triumph of good over evil, I used to think. But then, what is evil and what is good seems to be a grey area. Ravana was a revered scholar, and is still highly respected. He did bad things, but he wasn’t entirely evil.  That someone burnt an entire city wasn’t exactly good, even if was done by the “good” side. The idea is that there’s a good and bad in all of us, and there are times when we are one thing and not the other. It’s true of other, non-religious things too. First, we decided ghee, butter and all things “fat” were evil. Now it’s the parathas and the rice, because carb is sugar and sugar is evil. They’re all probably good in appropriate proportions. Ice cream is good too, perhaps once a year just before you do a 10 hour trek uphill, but too often, we skip everything after the first comma.

In this generically grey area of good versus evil, I will bring in stock markets. Which understands that it’s all a big grey area, this good and evil business. We will extol the virtues of Enron and then be disgusted that all of it was a fraud. The companies that went bankrupt, they might actually be good investments after their exit from bankruptcy. Those companies that show great results in bull markets suddenly start having unexplained fires in their factories in not-so-bull markets. Markets eventually call them out, but the problem isn’t that they do, it’s that they only “eventually” do. If a stock goes from 10 to 100 and then to zero, enough money can be made between 20 and 80, as long as you have the discipline to get out. This very idea makes is possible to make money from ‘grey’ companies, and that’s probably one reason why markets are much reviled or much exalted.

From the point of view of a practitioner, I believe now that there is no one single path to success. There are many paths. You could go the Buffett way, the Soros way, the Jhunjhunwala way, the Damani way, or the “you” way. They will all make their riches, provided there is enough discipline to do two things: a) stick with your winners and b) do not lose all your money. It’s often the beast inside you, that wants to break free, even from the rules that allow you make money from the greys that are businesses. That beast will never be slayed, but it must be tamed. So in this Diwali spirit, I will ask you one thing.

Keep some money aside for the beast. That voice inside that makes you want to buy companies that are about to go bankrupt. The stock that your friend told you he bought a week ago and it’s up 2x, and how can you miss the rally. The stock that looks great but you simply do not understand, but oh so many people seem to be talking about it. Some 1% to 2% of your overall portfolio, is to feed and tame this beast. It will make you feel good if the stock goes up. And if it doesn’t, oh it was just the tiny amount.

For everything else, keep your discipline on. Let the lights lead you when there is no moon, and indeed Diwali is the ultimate celebration of that. Happy festivities!

Now we go on to the most boring part of this letter. The predictions. Once a year, we predict for the next year. Then we instantly regret it, but leave the post on for a year to tell you our sorry state of affairs in predictions. We like to react, not predict. But hey, we’re giving one day a year – less than 0.3% – to the beast.

The Scorecard from last time

We wrote, last year, about our predictions. What’s come of them?

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.

Wrong. We saw only a 10% correction in both Nifty and the Midcap index. I would give myself 5 out of 10 but honestly a number is a number. You hit it or you don’t.

Nifty Year Gone By

So, 0/10. But yes, domestic investors did add a lot of money, taking SIPs to over 16,000 cr. per month.

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.

To some extent this was right. The 10-year bond went to 7.4% for a while, but then has stayed in a tight range since. It’s at 7.28% now. Long term rates have hardly come off “sharply”, though they are lower than levels earlier in the year.

10 year yield 2023

However, in the context of long term yields (beyond 10 years) the yield has somewhat come down.

This is very different from the yields in the US which had hit 5% on the 3month bond, and briefly hit 5% even on the 10 year bond, from the 2-3% last year. Still, 0/10.

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.

This is more or less true. Inflation did go up to 7%+ twice. but it has since retraced back to 4.87% for October, so that’s ok. The best companies have seen rates rise to 7.5% to 8% but it’s still quite good for them.

So 10/10.

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.

This is also true. We’ve seen fraud issues in so many startups. And more is being uncovered as we speak. Yet, we’ve seen a Mamaearth list, and a bunch of large fund raises like Incred.  But no unicorn has yet gone bust, even if Byju’s seems to be tottering and some others have frozen in their tracks.

Score: 8/10

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

This is just wrong. Capex actually went up. We have seen really strong results too, indication higher capex realizations as well. (Source)

India Capex

Score: 0/10

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.

I can claim something here – since real estate prices have risen. Interest rates have risen too but there isn’t yet a problem with loan servicing or growth. Bank credit growth to individual home loans has come down to 13% (from 20%+ two years ago) but this isn’t “slow” enough.

So 5/10.

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.

All of this is happening in some way. Japan’s debt is huge, and rates have just been going up slowly – recently, the BOJ moved from yield curve control (YCC, where they buy long term govt bonds to control yields) to opening it up at the longer end. The yields are nearly at 1% which is the highest in 10 years, rising rapidly in the last few months. Also the USDJPY is at a ludicrous 151, the highest in 30 years (since 1990!)


This hasn’t yet caused inflation, but it’s quite likely to, going forward.

So maybe 8/10 here.

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.

Much about this is happening anyhow. But I think there is no wreckage in Europe. Yes, they will cut rates early, but even that hasn’t happened, so 1/10.

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)

Oh, 10/10. Israel has taken over mind space. And indeed, the Russian war continues.

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.

US markets are up 10% in the last year, which isn’t that bad. But interest rates are very high at 5% short term yields. There was a “give up” scene during the SVB crisis where the Fed actually expanded its balance sheet and gave loans to banks against their treasury holdings at face value rather than market value. This is a form of QE too. The second series of hikes hasn’t yet come though, since the first itself was quite huge.

I would say 6/10.

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.

This was a weasel prediction. I can claim to be surprised by anything. China, for instance, hasn’t yet attacked Taiwan, which is surprising. So I’m going to just take 10/10 on this. Note to self: do not do this again.

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.

India is a stand out story indeed. And yes, foreign investors came back big time in the April-July part of the year. And personal income taxes were up 31% from last year, and GST collections at near all time highs (up 13%) Foreign investors invested in a huge way this year, and so did domestic investors with mutual funds.

FPI Investments

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).

Oh, 10/10. We will get into bond indexes only next year. (see post) And while the rupee only hit 80 in the last year, we are around 83.3, firmly in that range mentioned.

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.

The first bit was ok, as fixed income yields are up to 7% to 8% on really high grade debt. However, there has been no increasing wave or anything of the sort, just yet. So we’ll just say 5/10.

Overall my score is: I suck at predictions.

That’s all right for one day of the year, but not more than that. Life is largely about playing probabilities, and so are the markets. In general, probabilities are better than predictions. But no one wants things like there’s a 55% chance that markets will go up. We want certainty! India wants to know! As you can see, predictions are entertainment. Are you, uhem, not entertained?

Predictions for next year

Since I get so much wrong I might as well do either of two things: make boring statements that are guaranteed to be right, like “Markets will go up, unless they don’t”. Or, keep it short, precise and simple:

  • The mid and small caps will surprise us with their tenacity. Some will fall, and possibly the whole lot, just to keep things exciting. But the biggest earnings growth will come from the expensive mid and small caps of today.
  • The “India” theme will continue: more local manufacturing, energy independence and import substitution. Stock prices of these players will do well.
  • The rural economy will revive with the election spending and possibly give the agri/rural/2 wheeler auto firms a big push.
  • Global central banks will continue to keep rates elevated, until a crisis happens. I cannot predict crisis timeframes anymore. I’m guessing a major crisis will NOT happen in the next year – that is therefore my prediction.
  • Geopolitical risk will become more apparent, as more countries create room for defence and self-dependence; meaning, India will likely keep high import duties and try to discourage imports from rogue countries. This will benefit local firms, even in stock prices.

That’s all. I’m tiring of predicting. Happy Diwali and a Wonderful New Year, folks!

What’s happening at Capitalmind?

We’re doing very decently at Capitalmind, managing about 1,400 cr. in assets in the Capitalmind Wealth PMS. This has been a rough year in terms of markets, where the Nifty only went up about 7% in the last year (as of Nov 13, 2023) and our active equity portfolios – Adaptive Momentum, Surge India, and Resilient (formerly Low Vol) in the same time were more than 20% higher. We have automated a substantial chunk of our operations now, and are gearing up to new heights.

We have also received a SEBI AIF License which will finally allow us provide NRIs with our services, and we will launch shortly. First, with our money (Company’s and employees) and once we’ve ironed out the creases, open to the world. More on that shortly!

Our mutual fund license had to be withdrawn as rules for the mutual fund sponsors has changed, but we hope to meet the new criteria very soon and we look forward to reapplying. This is a long game and a few years here and there will not make a difference.

Much more will come from the research portfolios and our smallcases, where we continue the discipline of the process. And at Premium Slack, we’ve had some incredible conversations, love-hate relationships with Axis Magnus, travel destinations, bond market analysis, long term stocks and what not! Every year looks better than the last.

I’ll leave you with quick highlights of 2023, which I’m sure, you’ll enjoy.

Little wins that made me smile 

  • Money Wise, my first book, sold 10k+ physical copies. Thank you!
  • Capitalmind Podcast completed 500K listens in 2023
  • Got picked as one of the Open Minds 2023: Public Square by Open Magazine [link]
  • Capitalmind Saturday Coffee newsletter completed 100+ editions and is now read by 40,000+ subscribers.
  • Capitalmind turned 9 this year and much stronger than last year. Onwards and upwards!

Diwali Offers are LIVE!

Get 30% off on Capitalmind Premium and Capitalmind Smallcase. This is biggest offer of the year – if you have been on the sidelines, this maybe a good time to jump in.

Happy Diwali 2023! Of Lights, Delights and Silly Predictions

Earlier Diwali Posts:



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