Greetings from Team Carnelian!!
Wishing you and your family a very happy and healthy 2025!
The turn of the year is a good time for reflection of the year gone by as it offers insights and time to plan and build for the future. In this letter, we shall do both.
We would like to start the year by thanking all our investors and partners as we celebrated our 5th anniversary in May, recently surpassed the INR 10,000 crs AUM milestone, launched our offshore fund in The Gift City and successfully raised money in our Bharat Amritkaal Fund. We are now a team of 80+ professionals with sales offices spread across 7 cities and doubling our office space in Mumbai.
We are very happy with the way our entire team at Carnelian has stayed focused and delivered one more year of good returns to our investors. The past three months have been particularly challenging with economic headwinds, inflation, a slowdown, significant FII outflows, geopolitical tensions; yet the most satisfying part was that we outperformed during this phase as well.
In the world of cricket, when the skies are overcast, the key strategy is to protect your wicket and endure the challenging conditions. Once the skies are clear and conditions improve, the perseverance shown during the tough phase positions the batsman to capitalize effectively on the improved situation. In markets, the current year will be one which will be similar to the skies having an overcast condition.
We have time and again outlined through our letters and discussions that India is in the middle of a structural bull run and is in its golden phase leading to a massive wealth creation, though not without short term uncertainties/volatility from some or the other quarter (s). We have previously written and write again that we are at similar juncture in markets where we believe the pitch will be not so easy in the coming year because of the global set up and some of the domestic issues.
Let’s examine them:
Global Set up
US policy both economic and geopolitical will have a huge impact this year in shaping the market set up. Why do we say that?
Let’s first visit our understanding of economic policies. Trump had aggressively suggested tariffs during the campaigning phase to promote local manufacturing and counter China’s ascent. However, reality of the matter is US cannot do away with China manufacturing. Any aggressive tariff stance can have inflationary implications in the US. If China devalues the currency to counter tariffs, it might keep inflation in check, but a strong USD is something Fed and Trump’s economic advisors may not desire.
Post elections, Trump has made quite a few reconciliatory statements such as, “US and China can solve all the world’s problems”, by inviting Xi-Jinping for his inaugural and claiming that he and Xi "love each other’. These obviously hint at something. Elon Musk and many of his colleagues are pro-China.
China has recently put sanctions on some US companies. China has obviously been preparing itself for long. It has undertaken fiscal and monetary stimulus to shore its economy; it’s investment in defense and futuristic technology are also well known.
Crux of the matter is if US goes ahead with aggressive tariffs, and China devalues its currency the Indian currency will also devalue creating many implications for the Indian markets. Part of such a move is already witnessed in recent currency depreciation. Any aggressive devaluation by China like 2015 can create short term volatility as shown below:
How the currency and market reacted to China’s devaluation move?
Currency: Post the devaluation move during August 2015 to August 2016, RMB depreciated against USD by ~3-4% within a week but it did not stop there. RMB depreciated further and ended up ~7-8% weaker in a year. However, INR also depreciated and thus, limited the benefit to China’s move.
Markets: This led to short-term market fluctuation with most of the global indices seeing volatility over 1-month and 3-months period.
Any moderate move, like the current situation will lead to a sideways market for next few quarters. But the point is we don’t know how it is likely to be. Whatever the direction, it will have implications on the markets.
Trump is known to avoid wars and settle issues. Ongoing geo-conflicts can potentially settle down. If it happens, supply chain issues will be better. However, given the fact US and China has a cold war for supremacy, these issues are always unlikely to settle.
Domestic Set up
Domestically, the current set up is:
Inflation has been sticky leading RBI to pause its softening stance
Liquidity remains bit tight
Somewhat slowdown in earnings compared to expectation
Recent market performance has pushed the valuation close to perfection
Paper supply in equities continues to remain very high
Which direction the policies take will also depend on the direction of global policies referred to earlier.
However, India story structurally very well placed.
When we are sitting on this kind of set-up, a great structural story facing temporary headwinds, our advice to our investors is
Keep expectation low. We are anyway a big believer of investing with low expectations. If markets turn out to be good, we are anyways going to capture it.
Avoid excessive risk specially leverage. Take the risk bar high. We have done the same. Risk of complacency is very high post such market returns.
Stay invested. This is certainly not the time to change asset allocation. It is only those who remain invested through thick and thin, create wealth as timing the market is impossible. We continue to focus investing in great companies and businesses and not markets. As long as we have faith in those, we will stay put.
Every situation has some winners and some losers. Invest in sectors/stocks which will remain less impacted by the current environment. We think Banking, Pharma, IT and Manufacturing will do well this year.
Keep scouting for opportunities amidst volatility: Volatile times are the best to invest in structural opportunities at right price. Don’t miss the right ball though pitch is going to be tough.
We are committed to our investing philosophy and principles and are in no hurry to create quick wealth. We know long term is good and in long term you are with safe partners.
Once again, Happy 2025. God bless you with Hope, Health and Happiness :-)
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