Subscriber Update - May 2024
Too Much Optimism; Bumpy Road Ahead!
Dear Subscriber,
Welcome to the May 2024 issue of Equity Midas Capital’s Subscriber Update.
We have entered in the fourth year of operations with as much enthusiasm we had when we started our advisory. The support and encouragement from all of you has been over-whelming and helps us push even harder to improve our products.
This year was very positive for our recommendations. Markets have been very kind. On an average our recommendations (FEAST) delivered 47% returns for the year. We are quite happy with the performance and this was also inline with our expectations (read here).
As we review where we stand today, looks like we are back in the same situation as 2021 (when we had just started our advisory). The year before we kicked-off (2020-21) was a stupendous year for equities and so has been 2023-24. Today, it seems like every alternate stock has generated 50+% returns over the last year, just like 2020-21. This could not sustain then (markets had a below average returns year in 2021-22) and we expect it will not sustain this year as well for the overall markets. Note that the start of 2021-22 recommendations performance was also very encouraging as is the current performance of our recommendations.
Let’s focus on the good things first! FEAST and FOCUS both outperformed their benchmark indices by a decent margin. As expected, FEAST outperformed FOCUS in 2023-24 but we expect a tight match between the two this year.
Here is the snapshot of last year’s performance:
Welcome to the May 2024 issue of Equity Midas Capital’s Subscriber Update.
We have entered in the fourth year of operations with as much enthusiasm we had when we started our advisory. The support and encouragement from all of you has been over-whelming and helps us push even harder to improve our products.
This year was very positive for our recommendations. Markets have been very kind. On an average our recommendations (FEAST) delivered 47% returns for the year. We are quite happy with the performance and this was also inline with our expectations (read here).
As we review where we stand today, looks like we are back in the same situation as 2021 (when we had just started our advisory). The year before we kicked-off (2020-21) was a stupendous year for equities and so has been 2023-24. Today, it seems like every alternate stock has generated 50+% returns over the last year, just like 2020-21. This could not sustain then (markets had a below average returns year in 2021-22) and we expect it will not sustain this year as well for the overall markets. Note that the start of 2021-22 recommendations performance was also very encouraging as is the current performance of our recommendations.
Let’s focus on the good things first! FEAST and FOCUS both outperformed their benchmark indices by a decent margin. As expected, FEAST outperformed FOCUS in 2023-24 but we expect a tight match between the two this year.
Here is the snapshot of last year’s performance:
| PRODUCT | NUMBER OF STOCKS | CAPITAL RETURNS (%) | DIVIDEND RETURNS (%) | TOTAL RETURNS (%) | BENCHMARK | BENCHMARK RETURNS (%) |
|---|---|---|---|---|---|---|
| FOCUS (LARGE & MID CAP) | 6 | 39.27 | 0.80 | 40.07 | Nifty 200 | 30.27 |
| FEAST (ALL CAP) | 12 | 46.84 | 0.62 | 47.47 | NIFTY 500 | 33.16 |
Why the bumpy road ahead?
We are worried because there seems to be no reason to worry at all.
There seems to be too much optimism in the markets. Most of it also seems to be for valid reasons. We have a stable government despite it being a coalition government. The new government has made all the right noises so far and the structural reforms should go on as planned.
Inflation is under control and interest rates should start a downward journey soon. Lower cost of capital is good for equities.
Consumption is actually picking up, demand, especially rural demand, which was subdued is on the rise. India is a growing country; we need higher consumption to sustain this growth.
FIIs have been selling but this has been matched well by the retail participation. If FIIs do initiate some buying, markets will further improve. Retail money, especially thru Mutual Funds, has been the most consistent fund-inflow in the market in the recent times. This flow continues to be stronger than ever.
Corporate performance, though not great, did not show any signs of stress. Infact bank’s performance has been better than expected.
So then, why are we worried? Again, as we said, we are worried because there seems to be no reason to worry at all. It’s all too good to be true. When we cannot pin-point to any reason for a correction, market will fall due to its own weight.
Markets will continue to rise since there is no reason to correct. At the same time, they may correct big at the slightest opportunity. The reasons may not be very visible but that is the point. Essentially every move will be magnified, both the rise & corrections as well (when they occur). Higher retail participation will add fuel. We anticipate a bumpy ride in 2024-25 especially due to these reasons.
Some events that may trigger corrections can be: issues in the governing coalition, delayed or excessive monsoon, average/bad corporate results, unexpected announcements in the budget, delays in policy easing by central banks and change in government priorities.
Many of the above events may occur in July-August timeframe, if they happen at all. July-August, hence, is a critical timeframe for the markets.
For the year, we expect a average year for the market assuming operating performance of the companies keeps pace.
Do note that these are just our views, our analysis that is just one of the many possibilities that the future holds. Our recommendations are released irrespective of our views/analysis about the market. We do believe our recommendations will survive the market better than the rest.
Stock Performance Analysis
A hypothetical equal-weighted portfolio of our recommendations is used to calculate returns for the investment period. All our BUY recommendations released last year (31-May-2023) were updated to SELL on 31-May-2024. The returns showed in the table above are as on end of the day, 31st May 2024.
As on end of May 2024, an equal-weighted portfolio of our 2023-24 FEAST recommendations (in other words the average returns for our FEAST recommendations) have yielded 46.8% capital returns i.e. without dividends. FOCUS recommendations have yielded 39.3% capital returns in this period.
Both the portfolios have performed better than their benchmark indices. The overall returns are within the expected range considering the buoyancy in the markets and underlying company performances.
Let’s see how we got here:
As on end of May 2024, an equal-weighted portfolio of our 2023-24 FEAST recommendations (in other words the average returns for our FEAST recommendations) have yielded 46.8% capital returns i.e. without dividends. FOCUS recommendations have yielded 39.3% capital returns in this period.
Both the portfolios have performed better than their benchmark indices. The overall returns are within the expected range considering the buoyancy in the markets and underlying company performances.
Let’s see how we got here:
Key Observations
- Just like last year, both the portfolios closed near to their peak returns for the year. FEAST reached a high of over 50% during the year.
- Large caps saw a strong finish to the year. FOCUS gained 27% in the last three months from March to May.
- Both FOCUS & FEAST demonstrated much higher volatility as compared to the benchmarks.
- This year we had 2 stocks that delivered over 100% returns, 3 stocks that delivered over 50% returns & 2 stocks that delivered over 25% returns. Three stocks closed in the negative.
- Performance is largely in-line with back-test results. In years when markets are buoyant, EVM returns are typically very good.
Operating Performance Analysis - EVM View
Please refer to the
EVM Guidelines for Operating Performance Classification
to understand how we group the companies based on their annual operational performance.
Based on the guidelines above here is how this year has ended:
The data clearly shows that underperforming companies have also delivered similar returns as the companies which have delivered on their expectations. Isn’t this the actual definition of a BULL MARKET? We have been lucky, no doubt about it. The reason why the returns are more than 15-20% above the expectations is this bull market. We benefitted because we held on till we identified the next set of stocks with more potential.
Based on the guidelines above here is how this year has ended:
The data clearly shows that underperforming companies have also delivered similar returns as the companies which have delivered on their expectations. Isn’t this the actual definition of a BULL MARKET? We have been lucky, no doubt about it. The reason why the returns are more than 15-20% above the expectations is this bull market. We benefitted because we held on till we identified the next set of stocks with more potential.
Here is the detailed data of the company performance:
Subscriber Queries
Q1. If this year is similar to 2021-22, then will it be prudent to exit early. In 2021-22, the recommendations lost most of their gains in April & May.
Ans: Early exit or catching the peak is the holy grail. Except 2021-22, our exits were close to the peak returns they achieved during the year.
A similar question was raised last year as well and this seems be a recurring question in our subscriber’s mind.
Early exit is not something we have tested. Our recommendations need to be based on a strategy that is tested on past data. In this case it would be making a prediction of a peak on the markets or on the returns of the recommendations. We have not been able to identify any such indicators which will help us do this yet.
This does remain a focus area for us.
Q2. Do you invest in equity mutual funds? If yes, how do you choose them?
Ans: We do not invest in mutual funds. We believe we can do better than the mutual funds with our own recommendations.
Having said that, Mutual Funds are ideal for Wealth building. While we do not want to comment on specific mutual funds, here is how we look at mutual fund selection:
Selecting an equity mutual funds is harder than it looks. As on date, there are over 2500 equity mutual funds in India.
It is hence critical to decide a investing strategy that one wants to deploy in the markets and then select a mutual fund that matches the strategy. There are three widely respected strategies to invest in equity market: 1) Value Investing 2) Growth Investing 3) Momentum Investing.
A combination of these three strategies can provide a good structure for investing.
Second step is to identify the right mutual funds and the mutual fund manager who invest using these strategies. The past history of the mutual fund trades can be used to confirm whether the fund and the manager actually follows what they market.
Finally, a historical check on the returns should be made to verify if it matches to the investors expectations.
Any mutual fund typically has over 50-60 companies in their portfolio. With the three strategies, overlap between three mutual funds adopting these three strategies should be minimal. Essentially a bouquet of just three mutual funds will provide diversification of over100-120 companies in one’s portfolio.
Do note that this is not an advice, but an approach that you may consider while selecting mutual funds.
Ans: Early exit or catching the peak is the holy grail. Except 2021-22, our exits were close to the peak returns they achieved during the year.
A similar question was raised last year as well and this seems be a recurring question in our subscriber’s mind.
Early exit is not something we have tested. Our recommendations need to be based on a strategy that is tested on past data. In this case it would be making a prediction of a peak on the markets or on the returns of the recommendations. We have not been able to identify any such indicators which will help us do this yet.
This does remain a focus area for us.
Q2. Do you invest in equity mutual funds? If yes, how do you choose them?
Ans: We do not invest in mutual funds. We believe we can do better than the mutual funds with our own recommendations.
Having said that, Mutual Funds are ideal for Wealth building. While we do not want to comment on specific mutual funds, here is how we look at mutual fund selection:
Selecting an equity mutual funds is harder than it looks. As on date, there are over 2500 equity mutual funds in India.
It is hence critical to decide a investing strategy that one wants to deploy in the markets and then select a mutual fund that matches the strategy. There are three widely respected strategies to invest in equity market: 1) Value Investing 2) Growth Investing 3) Momentum Investing.
A combination of these three strategies can provide a good structure for investing.
Second step is to identify the right mutual funds and the mutual fund manager who invest using these strategies. The past history of the mutual fund trades can be used to confirm whether the fund and the manager actually follows what they market.
Finally, a historical check on the returns should be made to verify if it matches to the investors expectations.
Any mutual fund typically has over 50-60 companies in their portfolio. With the three strategies, overlap between three mutual funds adopting these three strategies should be minimal. Essentially a bouquet of just three mutual funds will provide diversification of over100-120 companies in one’s portfolio.
Do note that this is not an advice, but an approach that you may consider while selecting mutual funds.
Thank you for your support!
Ashish Arole
SEBI Registered Research Analyst (Registration Number INH000008136)
Equity Midas Capital
equitymidas.com