My 2014 Top stock picks and 2013 portfolio performance

Hello readers,

 Wish you all a very happy and wealth generating New Year -2014.

 How Indian markets performed in 2013 vis-à-vis my 2013 Forecast:

Before we get into 2014, let’s look back and see how the Indian markets performed in 2013 vis a vis the world markets. The Sensex was up by 9% with respect to 2012 closing levels (from 19426 levels to 21170). American equity markets registered their strongest year since 1997, with the S&P 500 finishing the year 30 per cent higher. European stock markets also experienced their strongest annual performance since 2009, as fears of a eurozone breakup abated and the single currency area finally emerged from recession. Germany’s Dax, rose 23 per cent on the year while FTSE 100 index finished the year up 14 per cent, its best performance in four years. However, the performance of emerging market economies was more mixed. MSCI’s emerging market index fell by 5 per cent in 2013.

This(Indian market performance) was not in line with my 2013 forecast (I had forecasted in my earlier blogs dated 1st January 2013 and 26th Feb 2013 that Sensex might touch 23000-24000 by the end of 2013). This was primarily because of over-reaction on US Fed asset purchasing tapering fears, Rupee devaluation and pure domestic factors like GDP slow down and Govt policy/ project approval inaction. But I am reasonably sure that we will reach the predicted levels soon in 2014. Recently, Goldman sachs and Nomura have predicted the same levels . While Goldman has predicted Nifty to touch 6900(Sensex equivalent of 23000), Nomura has predicted Sensex to reach 22000 by end of FY14. According to brokerage Deutsche Equities, Sensex may scale the 24,000 peak by end of the year.

How my 2013 portfolio performed (Top 12 stock picks) :

Pl refer to the same blog (dated 1^st January 2013) where I had mentioned my top 12 stock picks for 2013. In order to put my investment ideas to test, I invested in the same stocks in 2013 .My portfolio showed modest gains of 4% versus 9% of Sensex gains. The 3 top gainers were HCL(102%), Lupin (49%), and Bajaj Finance(16%).The  2 big disappointments were BHEL and Bank of Baroda(both losing 25%). However, am still bullish on the losing stocks and strongly think that market is being short sighted and not fully pricing their long term earnings potential and durable competitive advantages.  Hence I may hold them on for 2014 when they will show excellent gains.

2013 Portfolio results(Gain/ Loss%):

Company
Bank of Baroda					-26%
BHEL					-25%
Coromandel Int					-11%
GAIL					-4%
Jain Irrigation					-5%
Rural Elect Cor					-12%
M&M					2%
Bajaj Finance					16%
LIC Housing Fin					-24%
Lupin					49%
ICICI BANK					-4%
Powergrid					-14%
HCL					102%
Total Gain					4%

Lets see how my 2012 portfolio performed in 2013 . It  had gained 36% in 2012 versus 26% of Sensex gains and hence had beat the Sensex. This year the 2012 portfolio showed gains of 13% versus the investment price.

Company			Gain%
Axis Bank			48%
Bank of Baroda			-2%
BHEL			-26%
Coromandel  Int.			-14%
GAIL			-10%
IDFC			13%
Jain Irrigation			-17%
Larsen			56%
Reliance			28%
Rural Elect Cor			49%
Total Gain			13%

My 2014 forecast of the Indian markets:

I am a long term investor who focuses on long term trends and predictions of the economy/ market and the businesses; I would not dare to venture into the medium term precise Sensex forecast again. However would like to predict that India economy and the markets are at the threshold of starting a big and long bull run in 2014.  The economic and market cycles have bottomed out and will show a sustained long term positive trend from now, especially in the second half of 2014(post Indian elections). The biggest risk to this forecast is uncertain/ hung verdict in Indian elections in Mid-year or lame duck coalition government. Market has already priced in NAMO victory and might fall by 10-15% in short run if NAMO doesn’t come to power.  Things are looking positive on current account deficit(from >5% to 1.5% now), rupee stability(due to innovative and proactive measures from the new RBI Governor), export pick up, rural/ agriculture pick up due to good monsoons and inflation showing positive trends(CPI came at 9.9% in December  versus 11.2% in November). However things are not looking so good on the IIP figures(Industrial growth coming at -2% in November) and Fiscal deficit projections with the current expenditure run rate. Overall, the year is poised towards good pick up of growth in economy, industry and investment, especially after elections, provided that we get a politically stable government at center (regardless of which party comes to power). Hence solid businesses with competent managements, strong balance sheets/ profitability and excellent growth track records/ revenue visibility linked to those sectors which will directly get benefited with pick up in GDP growth, rural demand pick up, investment cycle and interest rate reversal will show a positive and sustained return on their equities.

My 2014 Portfolio of Top12 business/ stock picks:-

I am going to retain most of the stock picks of 2012 and 2013 while dropping 4 of them.

This is my recommended 2014 stock portfolio(15 stocks) :-

Company Sector Axis Bank Banking & Finance Bank of Baroda Banking & Finance ICICI BANK Banking & Finance Bajaj Finance Banking & Finance LIC Housing Fin Banking & Finance IDFC Infrastructure Larsen Infrastructure REC Power Powergrid Power Reliance Energy GAIL Energy Coal India Energy M&M Auto Bajaj Auto Auto HCL IT

The portfolio is heavily loaded towards Banking & Finance, Infrastructure/ Power, Energy and Auto sectors. These sectors are primarily interest sensitive and capital intensive sectors. Though the market (Sensex) has attained new peaks and have shot up >15% in last few months, this rally has not been broad based and has been limited to few sectors like IT, Pharma, consumer/FMCG and export driven businesses etc. However, other sectors like interest and capital intensive sectors have been left behind in the rally and we can still discover value in these sectors.

My favorite sector is Banking and Finance as I feel that this sector has bottomed out and will start looking up in next 6 months as the interest rate cycle reverses itself and investment cycle picks up after elections. The over-reactive market has hammered even the best banks and Finance companies with solid balance sheet, growth and NPA records with the same short sighted brush as the weak B&F businesses. Consequently solid B&F businesses like Axis Bank, ICICI bank, BOB, LIC Housing Fin are still available at attractive prices below their intrinsic values. Infrastucture/ Power sectors are going to benefit once the investment cycle picks up in second half of 2014 after the elections . The recent fast pace of clearance and approvals of about 3.5 to 4 Lac crore worth of projects by CCI(Cabinet Committee of Investments) and the new minister of Environment & Forest(Mr.Moily) will play a key role in starting this investment cycle. With this the best blue chip businesses among these sectors like L&T , IDFC, REC and Power grid which are available at very attractive prices will register very decent gains. Auto sector will again benefit from reversal of interest rates ,pick up of GDP growth and pick up of rural demand due to good monsoons in the second half of of the year and hence have picked up the safest and defensive bets in these sectors(M&M and Bajaj Auto) which have a good rural exposure too. Energy will always be an ever green sector in energy starved country like India and have therefore picked up the best businesses like Reliance, GAIL and Coal India again. Lastly picked up an IT sector stock(HCL Tech) as this sector will continue to grow in 2014 and 2015, especially HCL because of its strong growth track record, attractive price/ value equation and exposure to Infrastructure management where it a clear global leader.

All these players are dominant or big players in their sectors with consistent growth and profit performance, robust business models, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at attractive prices now with respect to their intrinsic value & historic PE, providing a great "margin of safety" for the value investors.

Wish you a very happy New Year again and Happy investing,

Cheers

Amar