The Lost Decade

27 DECEMBER 2019

On September 15, 2008 (at the stroke of the midnight hour of September 14, actually), Lehman Brothers went bankrupt. Much had happened before that event and many financial firms in UK, Europe, and USA were in trouble. But Lehman was the straw that broke the house of cards in the global financial system.

As the first decade of the 21st century drew to a close, it was clear that the financial giants would not be allowed to fail. As Bill Bonner, author of the must-read The Daily Reckoning, frequently writes: "the fix was in".

With a combination of government bail-out packages and record low interest rates, the financial firms were rescued and regulations ensured that smaller, boutique financial firms would have a more difficult time conducting their business. Across every traditional financial business from banking to trading to fund management, the share of the largest 10 participants has increased over the past decade. Those who were active or party to events that led to a financial meltdown which resulted in destabilising economies, governments, societies, families and - by some accounts - even resulting in deaths of thousands hapless individuals have actually been rewarded for their acts of negligence.

This perception of the "fixers and the fix" is one factor that has resulted in the victories of many unusual world leaders. A backlash against what Donald Trump called the "swamp".

Closer to home, the 2010 to 2019 period has been tumultuous, to say the least. The UPA-2 government led by the Con-gress party was drowning in allegations of corruption. A silent Prime Minister added to the perception of conceit and aloofness from the people. The successive victories of the Modi-led BJP government have put India on a course of a brand of Hindutva showing its political and cultural mojo.

Meanwhile, the economy is limping at best and future economists may soon label the sub-4% growth in GDP (these estimates are based on the older data series used prior to January 2015) as the "Hindutva rate of growth". The Nehruvian Congress preoccupation with Socialism gave us the famed Hindu rate of growth for 3 decades. The Modi BJP preoccupation with developing a more ethnically clean society will generate a Hindutva rate of growth.

The lost decade.

Every investor needs to understand the social and political environment before making an investment decision. For this important outer circle of the onion determines economic thought (or lack of it), which then results in economic policy which then influences businesses and their likely profitability - this then influences the price of shares or bonds issued by companies.

In some sense the period 2010 to 2019 was a lost decade for India.

The UPA-2 was first in hyper-policy mode allegedly driven by corruption or crony-capitalists and then drowned in "policy paralysis". The Modi government had great intentions but its primary focus on winning elections and engineering society to ensure 50 years of rule to eradicate the perceived misdeeds of the Nehru-Gandhi-Patel era, has hurt the economy.

Demonetisation was a failure and a disaster. None of the objectives - stated on the floor of Parliament as the reasons for this gargantuan misstep - have been achieved. The GST is a silly idea initiated by the Con-gress and eagerly adopted by the BJP. The money owed to the states as their compensation for under-collection will unravel this misguided policy. The objective of free movement of goods (removal of octroi duty) was a superb objective - the unified national tax was not. The unintended consequences of GST have been the shrinking of small and medium scale businesses which are the engines of job creation. The advantage to the larger enterprises is now obvious. The financial regulators and the governments intentionally fixed the financial system to rescue the large global firms. The GST in the Indian context, accidentally, made the larger companies more powerful.

Hey, I made my money!

But despite this lost decade, investors across asset classes (except residential property) made decent returns.

Table 1: India does not outshine global markets (all returns in INR)

Index / FundAnnualised returns
Quantum Equity Fund of Funds11.44%
Quantum Long Term Equity Fund11.25%
S&P BSE MidCap Index9.69%
S&P BSE Sensex Total Return Index10.65%
Quantum Liquid Fund7.44%
Quantum Gold ETF7.40%
INR / USD-4.46%
MSCI World Index14.09%
NASDAQ (Technology)21.05%
Dow Jones 3018.19%
Note: Data is for the period December 26, 2009 to Dec 26, 2019, source Bloomberg

Of course, individual stocks like HDFC Bank did much better (nearly the same return as 7x of Microsoft, but lower than the 12x of Amazon). And investing in the global markets would have given a far higher return than investing in India.

There is a clear disconnect between the "real economy" and prices of many assets. Large pools of international play money are looking for risky assets, however mispriced they may be, and this acts as a support for the price of that asset. With over 80% of European government bonds at negative interest rates (investors get less money than what they lent the government!) and interest rates in USA and Japan at continued low rates, there is ample desire to speculate and hunt for risky assets - like Indian equity or Indian government and corporate bonds.

In January 2010, the 10 year US Government bond gave you an interest rate of 3.8%. Now it is 1.9%.

In January 2010, the 10 year Indian Government bond gave you an interest rate of 7.6%. Now it is 6.5%.

In January 2010, the difference between the interest rate one could get on the 10-year US and Indian government bond was 3.8% (7.6% - 3.8%). Now it is 4.6% (6.5% - 1.9%). This "spread" looks attractive and hence foreign money is willing to buy more Indian government paper - but they may not be fully factoring in the risk of the Indian economy remaining dull for some time, thereby hurting the fiscal health of the government's balance sheet. And the fact that this could result in a decline in the INR relative to the USD, hurting their returns when they remit their capital back to home country.

The Indian Rupee has lost 4.5% per annum for each of the past 10 years against the US Dollar from INR 46 per USD in January 2010 to INR 71 per USD in December 2019 - the loss has been marginally more while the UPA-2 was in power as compared to the past 6 years when the BJP has been in power.

I have been an "India bull" for much of the time since I graduated from college in 1981. If there were periods when I was nervous (Harshad Mehta, BRIC) it was for reasons of valuation: I did not doubt the long term potential earnings power of the economy. Now, given what we have seen in the past 10 years with the failure of the UPA-2 Con-gress led regime and the inconsistency of economic focus by the BJP, I am not sure if India will continue to have robust, continuous, automatic economic growth.

The momentum of the "India economic engine" has been broken - and it needs to be fixed.

Until then, my allocation will become a little more defensive: less of equity, more of liquid funds and more of gold.

I don't know what the next 10 years will bring, but I would start the decade with more money in Liquid funds and Gold funds / ETF and less in equity funds (you should never have zero exposure to equity funds). Then I would wait and see what steps the government takes to get the Indian economy running again. Or wait for a significant (maybe 15% to 20%?) decline in share prices before one allocates aggressively to equity.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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4 Responses to "The Lost Decade"

Alpesh Patel

Dec 31, 2019

Happy to read you after a long long time..! I am addicted to your truths and those of Bill Bonner!!
Keep writing frequently please...!! And yes always thankful to you for guiding through Honest Truths for so many years...! Honestly stopped losing money after reading you since 2006.


Gunesh Apte

Dec 30, 2019

Thank you Equitymaster and Ajit, for appropriately describing the decade.
When we look back, we can realize that, we have probably lost lot of opportunities to make India as one of the finest nations in Asia. Small nations like Thailand, Singapore, UAE has moved ahead of us very fast, in terms of roads, infrastructure, jobs, quality of life, water management and we have progressed very slowly as compared to our small Asian counterparts.
We need huge efforts now to move ahead of these nations, and also head of Developed world (US, Canada, UK, Europe and Australia), in next 5-10 years, else we will lag further behind.May be, Authorities will take necessary steps in that direction very soon.
Some of the positives could be Corporate tax rationalization which has started, if followed by personal income tax rationalization could change things to some extent but that would be small steps in right direction.
Also, we need to encourage small and large business houses to start doing large investments in next 2-3 years, to see job creation ahead of other countries.
We as investors need to be careful, but optimistic and should keep tracking the economic situation closely.
We need to lower expectations from Equity and Debt both, and be realistic about all aspects of investments.


Sambaran Mitra

Dec 28, 2019

Well, that's a gloomy picture, Mr. Dayal.
You talked about reducing the equity component and increasing liquid/gold component. What %? The recommendation at the end of the blog still shows 80%-equity and 20%-gold/liquid. Do you recommend equity to be reduced to 70%? 60%? 50%?



Piyush Bhargava

Dec 27, 2019

Thanks Ajit, you have pointed all the incident & perfectly articulated, I also like to thanks your company Equity master & personals Fiance & CFG initiative taken. I am member from 2006 onwards, now working as Financial planner.

Like to meet you again on Annual conference in 2020

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