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How to Make Mr Market Serve You in 2017...
Tue, 27 Dec Pre-Open

As we're just few days away from entering 2017, let us review the year gone by. 2016 was surely a year to be remembered. It saw many major economic developments that have changed the global economic scenario for better or worse. A glimpse into the year gone by, and we have the Brexit, Indo-Pak surgical strikes, US Elections, OPEC deal, Fed rate hike, etc. And oh, not to forget the demonetisation saga that's still going on.

All of the above developments had impacted Indian financial markets. Most of the asset classes have been beaten due to the volatility led by above events. Let's have a quick look at how various assets have performed during 2016.

Starting with equities and mutual funds, these assets have felt the maximum brunt during the year. While the Sensex managed to show good performance amid global volatility, it failed to maintain the momentum after demonetisation. As per an article in Business Standard, the Sensex was up by 5.6% since January 1st till November 8th (the day when the government announced demonetisation). However, since Nov. 8th, the Sensex is down 5.8%. This suggests that all the gains that the equity markets saw before demonetisation have been wiped out. As for mutual funds, many important sectors such as FMCG, IT, and pharmaceuticals have been underperformers during 2016 and affected the overall performance.

Moving on to gold, often hailed as a safe haven investment bet during volatile times. The yellow-metal witnessed buying interest during most part of the year. Events such as Brexit and an underperforming US economy made investors take refuge in gold. However, most of the gains seen here were reversed during the last few months of 2016. The demonetisation move and the US interest rate hike weighed on gold and wiped out most of the earlier gains.

Lastly, real estate - yet another investment avenue - stood flat during 2016. While real estate sales held in good stead during the first three quarter of 2016, they went for a toss after demonetisation. Also, real estate is one of the worst affected sectors from the demonetisation drive.

So, as is evident, volatility and uncertainty fueled by the above events have taken a toll on investment returns during 2016.

Take a sneak-peek into 2017, and you will find many similar events lined up in the upcoming months that can lead financial markets trade on a volatile note over the short-term.

This begs the question: What can one do to sail safely through such times?

Being Buffett-followers and taking to his advice as fish to water, we think the best way to counter the above volatility is to follow a long-term value investing approach.

As far as our outlook over the long term is concerned, we believe that the benchmark indices can go up as much as 70% in the next two-to-three years.

For Indian stock markets, our research in March revealed that, in aggregate, the profit margins of Sensex companies were trading at ten-year lows. So, if profit margins were to revert to their long-term averages and rise, the Sensex may follow. Tanushree Banerjee, Equitymaster's co-head of research, recently reaffirmed the above claim and stated that the 70% earnings upside extends well beyond Sensex.

Here's a snippet of what she had written:

  • Plenty of blue-chip stocks outside of the Sensex can fetch earnings growth in excess of 15% per year over the next three years. But if earnings were to grow at 15%, and if profit margins were to rise to their ten-year average of 11% from the current 9.6%, an EPS of Rs 100 can become Rs 174 by FY19. Which means an upside of 74%.

Our StockSelect team is already on the lookout for opportunities in such blue-chips. Subscribers can expect recommendations from the StockSelect team, as and when these blue chip stocks offer opportunity to invest.

All in all, ignore short-term trends and follow a long-term value investing approach. If that is done, you are letting Mr Market serve you and not dictate you.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Feb 20, 2018 (Close)