For a change I want to start this week with India. We are now 25 years into “The Asian Century”, and in the last couple of weeks we have been looking at results so far. The detail will be in the upcoming TopFunds Guide (we will let you know when it is available) but for now I can say India is the star, whether we look over the whole 25 years, the first decade, or the period since 2010. It clearly surpassed the US stock market, which only got going in the last decade.
If you haven’t been to India, or not in recent years, you will enjoy the travel notes “Impressions from a week in Delhi” which is a guest blog from Andrew Dalrymple, founder of Aubrey Capital Management. He shares fascinating insights on India becoming “wired-up”, infrastructure and property, and the (still) limited foreign investment in their stock market.
When we first recommended India as a Trade Of The Decade back in 2009 the fundamental attraction was the extremely young population, whether evidenced by sober GDP per capita or more basic (in)sanitary conditions. The enthusiasm of domestic investors grew over the years, with the Sensex index exceeding 85,000 in September 2024.
Since then this index has struggled, though more a breather than anything more calamitous, down 11%. This correction was over-due as the valuations were extreme, not unlike the US. In contrast to the US, the long term upside for India is still clear, on a range of measures. For example, GDP per head is still only $9,200, compared to $73,600 in the US and $54,100 in the UK.
Our technical analysis suggests more downside (70,000 or lower?), but such projections have typically been too negative over the last 15 years, with a huge army of small investors providing considerable support, even if foreign investors are more reticent, a seemingly perpetual state.
Yes valuations are stretched and economic growth is slowing, but if there is further notable weakness in the months just ahead (Trump tariffs?), you might like to start accumulating India if you are not already on board.
The last week’s headlines have centred on inflation and growth numbers, and the direction of interest rates in 2025. US rates may even edge up this year, particularly if Trump stokes the inflation embers. In the UK, inflation might be stubborn, but the bigger problem for the authorities is lack of growth and a loss of confidence in the economy. There was a whiff of panic in UK equity and bond markets in recent weeks, so a bounce on Wednesday, triggered by a very small piece of good inflation news, was most welcome.
All of this has led one Bank Of England official to suggest that, with the outlook increasingly gloomy, the central bank must stand ready to cut interest rates six times this year. This possibility is one to which we will undoubtedly return, because it could light a very positive fire under the UK stock market. In particular it would benefit smaller companies which are considerably more reliant on bank finance. Plus some technical analysis implies that the pound is about to begin a recovery versus the US dollar (a possibility which stands out for a number of currencies, notably the yen). If this did occur it would be unhelpful for the big companies populating the FTSE 100, for whom weak sterling boosts profits, and small caps might begin a notable period of outperformance versus their large-cap brethren.
The pivotal US stock market still appears to be drifting a little ahead of Trump taking the Presidential wheel next week. In theory he could do a lot of stuff by executive order, with no oversight, on his first day in office. One of those might be tariffs. We will soon find out.
When there is such uncertainty it is invariably best to do little or nothing until the dust clears, and perhaps use the time to remind ourselves what we do now. For example, financial historian Jim Grant observed that “progress is cumulative in science and engineering, but cyclical in finance”. Despite centuries of financial market history, the problems with which investors grapple remain the same.
In particular you cannot innovate away human nature, and the cycle of fear and greed.
It is undoubtedly the case that most of the tech companies in the US are of the highest quality. That isn’t the problem. The problem is the ever-higher prices that investors are prepared to pay, irrespective of the valuation. This isn’t like the tech bubble of 1999/2000, when many companies were on eye-watering valuations based on little or no earnings and much hype. It is like the 1970s, and the Nifty Fifty stocks, mature high-quality businesses, but on dangerously high valuations.
No one knew when that bubble might burst (as no one knows today), but when it does the quality provides no hiding place. One major company, Bristol Myers, announced profits which beat market estimates. But it still fell 55% in 1973/4. It was never a bad company. It was just a bad investment, for which naïve, greedy investors had massively over-paid.
Today there is $50 trillion invested in the S&P 500, and 40% of this is invested in just 10 stocks, the other 490 stocks being fundamentally over-looked. Worth repeating, you can’t innovate away human nature. This time isn’t any different.
Let’s turn to our Dynamic Portfolios as there are six of them updated this month, ranging from two Bonkers Portfolios to the UK and Commodities.
The Bonkers Portfolios should be regarded more as a bit of fun. But they do highlight the massive potential for selecting funds using “momentum” e.g. 15,512% growth since launch in 1995, which is nearly 12x the return from the index. There is no better way of illustrating that you should avoid those who solely promote index trackers, who I call The Guardians Of Mediocrity.
As you will see, the UK All Companies Portfolio had a strong 6 months, up over 3x the index and 2,732% since inception in 1994, after charges and with income reinvested.
I could go on, but have a look at the updated Dynamic Portfolios yourself, which this month also include the Asia and Cautious Portfolios. The Asian portfolio is made up of both unit trusts and investment trusts – we have no preference, we just want the fund which has the greatest momentum.