Why does buy and hold strategy work in case of Indian equities?

Investment | Published on 5th June 2018 | 850

Did you know that if you have bought the Sensex in 1980 and held on to it, your wealth would have multiplied nearly 370 times? There are much better stock-specific cases. For example, an investment of Rs.10,000 in Wipro in 1980 would be worth Rs.450 crore today. Similarly, an investment of just Rs.1 lakh in Eicher Motors in 2002 would be worth a whopping Rs.20 crore today. These are real case studies and there are scores of such stocks that have given humongous returns. The bigger question is why does a buy-and-hold strategy work in the Indian context? Buying a frontline stock and holding it for the long term is almost like guaranteed profits in the Indian context. There are basically 8 reasons why the buy-and-hold strategy works so seamlessly in the Indian context…

8 reasons why the buy-and-hold strategy works perfectly in India…

  • The India growth story began after economic liberalization in 1992. The real expansion of manufacturing capacity began after 2003. When higher manufacturing capacity combined with investments in infrastructure, it actually unleashed growth in Indian GDP over the next 15 years. That is why stocks linked to GDP growth and income levels became obvious buy-and-hold stocks. These include stocks from sectors like banking, automobiles, capital goods, consumer goods etc.
  • In the last 15 years, we have seen large Indian companies set up manufacturing and service capacity of globally comparable scale. Today India has companies like TCS, Reliance Industries, Tata Motors and L&T which are beginning to acquire global scale. Normally, buy-and-hold works very well when scale is in your favour. However, this also means that buy-and-hold may not continue to work perpetually due to the size effect.
  • There has been talk about the great Indian consumer story, but in reality the consumer story has just about begun. Consumer stocks have typically outperformed in India because per capita income levels in India are still way below the levels of other countries. For example, per capita income level in India is less than $2000, whereas even countries in Latin America and Africa have much higher levels of per capital income. That is why buy and hold has worked so well.
  • Most investors still associate wealth creation with old economy companies and factories. But the real wealth has been created by new economy companies. New economy companies like TCS and HDFC Bank are among the most valuable. That is the trend in the US too. In the last 15 years, the mix of technology and automation has created tremendous hidden wealth. Now that is being perpetuated by artificial intelligence and robotics. The buy-and-hold idea looks set to continue.
  • India is just about getting to absorb the global opportunity in the real sense of the term. For example, global trade was a minuscule portion of India’s GDP and it is just about beginning to build up. As Indian companies open up to the global opportunity, there is a huge global market that is opening up for them. The opportunities are still limitless.
  • Structurally, India is shifting from a high interest rate economy to a low interest rate economy. This has been driven by lower inflation and lower cost of funds. When rates come down from a higher plane, there is a long term wealth creation that happens. We saw that in the US markets post 1981 the buy-and-hold strategy really worked for a very long time. India too could benefit from that kind of a shift.
  • Some of the biggest wealth creators in the last 15 years have been the mid-caps which graduated to becoming large caps. From Bharti Airtel to Lupin to Sun Pharma to Infosys; these were all erstwhile mid-caps that transformed into large caps. There is still a massive list of quality mid-caps available in India that has the potential to transform into large caps, creating wealth in the process. This is, again, a virtual assurance that buy-and-hold strategy will continue to work in India.
  • Last, but not the least, there is the comfort of institutional buying from domestic and institutional investors. Domestic mutual funds are flush with cash and the equity fund inflows are still very buoyant. Indian investors are likely to infuse over $75 billion in the next 3 years and that will keep the buy-and-hold strategy running. Also global investors will be more than willing to enter India once there is clarity on the future of reforms and the valuations are slightly cheaper. Either ways, the buy-and-hold strategy is likely to continue its play in India.

Indian markets are in the same position as the US markets in the 1980s when structural shifts were happening and new wealth creators were emerging. As long as that trend continues, the Indian buy-and-hold strategy is all set to continue!