Annual Review 2024 & Way Ahead For 2025

Wishing everyone a very happy & prosperous 2025 !!!

We live our lives zoomed in. We are on the ground, in the moment, every single day.

Zoomed in approach creates 2 core challenges -
Struggle feels bigger than it really is.
Growth feels smaller than it really is.
The solution: Zoom Out

The zoom out view provides perspective on the manageable nature of your struggles and the impressive nature of your growth.

The end of the calendar year is a perfect time to ZOOM OUT, reflect and prepare for next year.

2024 was an eventful year for the whole world. We saw the U.S. Presidential Election, India's General Elections, the third year of the Russia-Ukraine war, the Israel-Hamas conflict, rising inflation, and higher interest rates, among other notable occurrences. Narendra Modi secured a third term as India's Prime Minister, while Donald Trump won a second term as U.S. President, potentially reshaping global politics in the years to come.

The highlight of 2024 was India's triumph in the T20 World Cup! 😊🏆

This year, US market performed exceptionally well. On the other hand, We started 2024 with backdrop of very good returns from 2023 & this year also, Indian stock market showed decent performance. A big thanks to DII & Indian retail investors who stand strong & helped Indian market to absorb most of the shocks & Big FII outflow.

In last year annual review, I wrote "Be Humble & have reasonable expectation".
Here we are after one year with some good returns from whole Indian market.

Nifty 50 index +9.5%
Nifty Midcap 100 index +23%
Nifty Smallcap 100 index +23.5%
Sectors Outperformed - Pharma, Capital goods, Manufacturing & its proxies, IT, Realty, Infra, Hotels, Jewellery & Consumer Durable
Sectors Underperformed - FMCG, Banking, NBFC, Building Materials & Metals


Revisiting last year's annual review :

In last year’s annual review, I discussed several key topics: the peak of interest rates, setting reasonable expectations, government-led capex and the frenzy in IPOs, SMEs, and small-cap stocks.

1. Election Results: Both general and state elections favored the existing government, ensuring stability in policies and plans.

2. Interest Rates: The US Federal Reserve implemented three rate cuts this year and expects fewer cuts ahead. RBI remains in a wait-and-watch mode, with no interest rate cuts in India yet.

3. Government-led Capex: Capex picked up this year, benefiting most sectors associated with it. However, there was a slowdown in government spending during Q1 and Q2 due to the elections, which impacted company earnings. Spending is expected to increase in Q3 and Q4, with many companies shifting orders to these quarters.

4. SME & IPO Market: The craziness in the SME and IPO markets continues, with the segment becoming overheated. In 2024, there were 87 IPOs and an whopping 245 SME IPOs. Promotor’s are doing QIP like there is no tomorrow.

5. Stock Performance: I anticipated large-cap stocks to perform well in 2024 but growth has not materialized in many of them. Instead, mid and small-cap stocks have once again performed exceptionally well, with most growth coming from these segments.

Indian stock market showed decent performance in 2024. 2024 was the 9th straight year of consecutive positive returns & its a longest streak on record. My personal portfolio also did exceptionally well because 70-80% of the stocks were from sector facing tailwinds and rest were from sector facing headwinds and trading at reasonable valuations.

Learnings from 2024 :

1) Focus on Growth -
Money has tendency to chase growth so we should always try to look for sectors and stocks going through tailwinds because that’s where growth will come and so as liquidity. Whenever there will be scarcity growth in market then investors will start chasing limited growth stocks and over the period time they will make those stocks extremely overvalued. This year, when many companies started posting weak numbers, investors started looking for high growth and that’s the reason, we are seeing very good returns and overvaluation in EMS, transformer, Consumer durable, Capital goods sector.

2) Importance of Sector Tailwind -
If you invest in the right sector experiencing tailwinds, you've already completed 60-70% of the work. The next step is to find good companies within that sector that are trading at reasonable starting valuations.

If you are investing in sector going through headwinds, Its difficult to make money because first you are investing in stocks where sector headwinds going on and not sure when tide will turn into tailwinds and then you need to look for stock which will go through these headwinds successfully and come back strong and then you need A LOT OF PATIENCE to wait till tide turns.

Since I started focusing on sectors going through tailwind, my returns improved significantly. From last few years, I always try to ensure 70% of the portfolio is allocated to sectors going through tailwinds and only 20-30% allocated to stocks going through headwinds where I can wait for decent amount of time.

3) Liquidity plays important role -
In high liquidity environment, you pick any Tom Dick Harry with any story & you will still make money.
In low liquidity environment, you pick strongest fundamental stocks and still you will either see drawdown or consolidation. You must focus on good quality business where Profits and Cash flow is visible in this environment.

If you are doing positional TechnoFunda investing then understanding what kind of market we are currently in is very important.

4) Navigating through Headwinds with 2-4-6-8% strategy -
When sectors and stocks face headwinds, recovery can take a long time. Previously, I used to right away build a position as soon as I get cheap valuations but these kind of situation might create value trap for long time. From last 1-2 years, I started following 2-4-6-8% strategy.
Suppose, I find stocks which going through headwinds but available at cheap valuation then I follow below process-

a) Tracking Position :
I will create 2% tracking position for stock which is going through headwinds and I am not sure when things will start improving.
b) Increasing It Slowly :
Then I will simply wait for either Fundamental trigger or Technical breakout. Whenever I will get one of the above trigger then I will increase position to 4%.
c) Taking It Higher :
Then if things are really turning around and stock started moving from headwind to tailwind which you can see through quarterly numbers then I will increase the position to 6%.
d) Final size :
If fundamentals consistently improve and technical breakouts continue, increase the position to 8%.

5) Exit Framework -
In our fast-paced world, it's essential to continuously review our investments rather than adopting a "buy and hold forever" mindset. Over the past 2-2.5 years, I've learned the importance of having an exit framework ready. There are numerous reasons to exit an investment, such as overvaluation, sector headwinds, business headwinds, technical signals and more.

6) Tracking results & concalls -
In last few years, I started tracking earnings result and concalls of multiple stocks and it helped me in identifying tailwinds and headwinds from multiple sectors. We should track earnings numbers & concall of various sectors & associated stocks. This practice aids in positioning our portfolio more effectively.

7) Brave new world -
Always follow the money and always remember in this “Brave new world” government have become more powerful and they are deciding winners and losers.

Way Ahead For 2025 :

1) Be Humble & have reasonable expectation :
We have made more than expected returns in last few years & valuations are not comfortable in some part of the market. We need to do much more digging to find good reasonable valued opportunities.
All we can do right now is to have clarity on the investment timeframe and the price we are comfortable with for the businesses where we think earnings growth will be healthy over the next 1-3 years. This becomes very important once the “buy high, sell higher” phase of the market takes a pause or gets broken for sometime, as we have experienced recently.

We need to keep reasonable expectation from the market for this year because most of the time reason behind our disappointment is unreasonable expectation.

2) Madness of Crowd - IPO & SME Euphoria :

IPOs have become very hot over the last few years. We had a total of 87 IPOs and a whopping 245 SME IPOs in 2024. Company just needs to say IPO and tons of retail investors are ready to pay more than what promotor ask for.
Many people apply for IPO to get some listing gain & that’s fine. First of all, Probability of getting allotment is very low then in case you get allotment then you will get less quantity and then post listing gains, stock start trading at very high valuations where you will be not able to add more quantity and from this stage it’s very difficult to make money in long run.

IPO already come at high valuation + Post listing euphoria makes it more overvalued = Difficult to make money if you hold it for long time

Personally, If I find any interesting IPO then I apply for it but if I don’t get allotment then I simply wait for stock to form base and stock to show good earnings numbers or IPO base breakout and then I revisit the stock.

IPO Euphoria, SME & Small cap bull market stories, Hope based Target prices, QIP at top of the bull market, Stocks moving without any fundamental earnings, People extrapolating returns and growth estimates for next 5-10-15 years, New participants buying stocks at the top of the valuations, New participants buying Penny stocks & so on. These are pretty common things in every bull market.

Currently, Greeter fool theory working in IPO & SME segment where one can make money by buying overvalued stocks and selling them for a profit later, because it will always be possible to find someone who is willing to pay more higher price.
This kind of trend is unsustainable & sooner of later, these kinds of things reverse back to mean.

3) Be ready for lot of Volatility :
Always remember in this “Brave new world” government have become more powerful and they are deciding winners and losers.

As Trump became president of most powerful country USA, there will be lot of changes in global politics, return of tariffs on various countries & many more. We need to keep eye on these changes and all these changes will create massive volatility in coming time but that’s fine, we all know what we are signing up for :)
AND Best part of volatility is it creates Opportunity every now & then.

4) Government & Private Capex Needs to Pick Up :
For FY24-25, government planned 11.1 trillion rupees capex Out of which Government only spent 4.15 trillion in first two quarter and expected spending in remaining two quarters is 6.9 trillion. It is almost 1.16 trillion per month Capex spends. Q3 is almost getting over now and we haven’t seen much orders coming from government yet. A significant increase in government capex is needed in Q4 to end FY 2025 on a positive note.

Private capex is not picked up in India & not many companies have announced private capex yet. To achieve high GDP growth, both government and private capex need to pick up.

5) Interest Rate Cut :
Globally, the interest rate easing cycle has begun, except in India. RBI and MPC have so far refused to ease policy or inject liquidity into the system. Given the current low growth environment in India, the RBI will soon need to start cutting interest rates to support economic growth.

6) Opportunity comes to prepared mind :
We Humans are funny creatures. We keep putting off good things for tomorrow and most of the times when luck is there we are not able to grasp the opportunity due to our lack of preparedness.

Many companies posted poor numbers in Q1 and Q2, but there is a lot of hope from Q3 and Q4. We should align our portfolios towards sectors expected to perform better in these quarters. Currently, we're in a sideways market, which is an excellent time to analyze various companies, read conference calls, and track multiple stocks where valuations might become reasonable soon. This kind of market creates a base for future leaders.
There are plenty of opportunities available, and if this consolidation persists, even more interesting opportunities will arise. We just need to stay focused and consistent in our efforts.

Sector Tailwind + Growth + Reasonable Starting Valuation + Fundamental Catalyst + PATIENCE OR Sector Headwind + Decent Growth + Extremely Cheap Valuation + Fundamental Catalyst + LOT OF PATIENCE = Long Term Investing Journey !!!

Sectors to watch out :
1) Banking & NBFCs
2) Pharma & Hospitals
3) Manufacturing & It's Proxies
4) Hotels, Jewellery & Aviation
5) Premium Real estate & Pre engineered buildings
6) Energy Transition - Renewables, Transmission & Cables
7) Capital Market (Sector might consolidate with Market but long runaway ahead)

I will keep holding 15-20 stocks in long term portfolio with below combination:

Long Term Portfolio = Compounders + Megatrends + Variant Perception

I am so grateful to have you share this long term investing journey with me in 2024 & look forward to continuing our connection in 2025.

Best wishes for a healthy & joyful 2025 !!!

Disclosure: I am not SEBI registered. The information provided here is for education purpose only. Hence, always check with your financial advisor before acting on any contents of this newsletter.