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Going Back to The Golden Era

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Just like an author cannot write without inspiration, an artist cannot compose music without mood; a value investor should never look into the future without studying the past.

No, this is not some social media forward, but a conversation with an investor Mr. Mehta on Sunday evening got me into thinking.

\”Harsh, all your stories talk about this being the right time to invest. But you cannot ignore markets are still volatile.\”

\”And what makes you think this is not the time to invest?\”

\”Subdued growth in an economy, declining corporate profits, slump in auto sales, rising NPA’s. Harsh, these factors have led to overall negative sentiments. Investors are worried about losing money.\”

\”Do you know where we are currently?\”

Looking confused, he replied, \”Means what?\”

\”We are exactly where markets were during 2003.\”

\”Like economic growth?\” asked Mr. Mehta.

\”Not just GDP, but every parameter that you mentioned., GDP, corporate earnings, auto sales, interest rates and a lot more.\”

Now I got his attention. So supporting my argument, I pulled out a few graphs.

 “See, do you understand what I mean?” I asked him.

“What?” he inquired.

“From the times of good growth in 1997, and a decent growth in 2000, the economy went through a bad patch for a couple of years, but only to spike up again. Mr. Mehta, I will never say dull phases will never come, but since the fundamentals of an economy were intact, after every dip, the economy has bounced back with a bigger jump on most of the occasions. Right?

“So what? There have been phases of slowdown many a times. Over the past 25 odd years, the Indian economy has seen a growth rate of less than 6% for 6 of these 25 years. In fact, it has touched 4% mark on 3 out of those 6 occasions,” he argued.

I continued, “As a value investor, what you should see is that the 25-year growth rate is over 8.5-8.7% CAGR. But that’s not it! If you look at the table, 1999 was a year with a negative EPS growth of 19%, similar to 2016, which was a year with a negative EPS growth of 5%. Let’s look further now! 2000-2003 were slow years, identical to the subdued growth we have seen from 2017-2019.


And if you take a quick look at the corporate profits to GDP – there has been no change in the contribution in the last 15 years. We’re where we were in 2003. Back then, the contribution of corporate profit to GDP was also at 2.8%. Clearly, 2018 is mirroring 2003 bottom,” I told him.

“Wait Harsh, maybe you’re jumping to conclusions way too soon,” he snapped back. “What about the consumption? It is decreasing quarter on quarter, clearly not a case before.”

So what I did is show him to charts. One, data of car production in India from 2017 – a downward line! I then showed him another chart that showcases the trend line over the past 20 odd years.

I then continued, “The above chart shouts out that India is going through an extremely rough phase, but the below chart shows a longer trend and shows a completely different picture.

Every time there has been a dip, there is usually a big jump up that follows. This trend line shows what to expect in the future. Also, if you take a closer look at the period 1997 & 1999, automobile production was stagnant. And in the year 2002, it grew marginally by just 12%. And, if you look at the phase of 2016-18, there was a jump of only 15%. Another similarity with 1999-2003 that we surely cannot miss!”

“And inflation?” asked now curious Mr. Mehta.

“India’s CPI fell from 4.67% in 1999 to 3.76% in 2004, similar to the downfall we saw during 2015-18 from approx. 5.8% to 4.8%. This is supported by declining interest rates. The interest rates at the start of 2001 were somewhere around 9%, which gradually flattened over time to touch 6% by 2004. From 2018, the RBI has been easing rates, which currently stands at 5.15%, a fall from 6.5% in 2018.”

Mr. Mehta looked excited.

“Don’t be so excited. I know you must be thinking that we are all set to enter the golden phase of 2003-08. And, history says most likely. The government back during 1999-2003 took a lot of initiatives for infrastructural growth. And, we can see the same with the current government as well. Along with this, all the reforms shall pave the way for growth in the next few years.”

“So, you genuinely think Indian stock market shall again grow by 6 times as it did during 2003-08?”

“Now you’re forcing me to predict the stock market movement, which I never do. Never deviate from the fundamentals, is your answer Mr. Mehta,” I smiled.

“Tell me more about it.”

The conversation has gone a lot longer. Click here to read the next part of the conversation.


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