2015 odd year: A lot of people keep talking about how 2015 is like 1991 or how it is like 2008. I think 2015 was an exceptional year which was affected by three diverse, unrelated factors. One factor was global growth and its effect on China. A secondary effect of this factor was dip in oil prices and less funds for sovereign funds. There was also the fear of yuan devaluation because of export comparativeness. Plus, US was relatively more stable and therefore a lot of money from EMs got sucked back in which we also got affected. The second factor was the business of terrorism in North Africa and Gulf which obviously affects cash flows and oil. The third factor is climate. So there were crop disasters all over the world which obviously affected livelihoods, economies and crop prices.

Out of these, reversals may come from a) climate. There is going to be opposite of El Nino - the opposite of droughts and floods. In India, after two years of bad monsoons, it is expected to be better. b) The North African problem: IS and global terrorism. Nobody knows when that will end. c) Global growth: US seems to be stabilising but it is still a bit of a question mark. On the other hand, in China there are fears of hard landing. I want to move this discussion towards why the present situation is different and why the priority of factors to watch out for will be completely different from the previous years. The worst that can happen is not really a hard landing for China. The worst that can happen is actually a massive yuan devaluation irrespective of what happens in economic growth of China. That will hurt comparativeness and that will hurt the path we are travelling on. On the other hand, the best that can happen is that the US can actually revive and emerge as the biggest consumer in the world. This revival will help countries besides China and some of the slack of the world growth will be taken off China to whatever extent it is possible including India. Thus, the thing to watch for is US growth and not Chinese growth. Number two, watch US dollar and yuan, the way they move and not oil prices or US interest rates because at the end of the day, oil prices are only a symptom and are not going to shake the world economy.

At the end of the day, US interest rates will go up only if the US growth revives. So we were looking at the wrong parameters. I will give you other example. For the last few years whenever a QE (quantitative easing) was announced anywhere in the developed world, our entire research department used to shout yah! that means a lot of money will come to India. I think it is going to be the opposite now. When the focus is on global growth (developed world growth and not the emerging markets), whenever there is QE, people get suspicious of world growth coming ahead and they say not much money is going to be available for the emerging markets (EMs). The relative part of India being in a better position is a small subset in the overall equation of global growth. Therefore, the role of the government in taking India's economy forward is subservient to where the growth in global economy takes us. here are three reasons behind it. 1) Funds flow. 2) If you take the top 10 Sensex components which accounts for roughly 75 per cent of the Sensex EPS growth, so you will see that 45 per cent is related to world growth. 3) Job creation: with your commodity prices coming down, oil prices and so on will make you more competitive only if there is huge capex. In the absence of that, what is more important is job creation. Export jobs have been coming down because of the state of world growth.

One positive trigger that could cheer up India in particular India in particular will cheer when US growth goes up. All the smaller things which I am going to talk about next are not as relevant. As I mentioned before because of funds flow, jobs and all that, the trends have been fairly mixed. For example, domestic air travel, petrol, car, CVs all that have done well. Steel, capital goods, cement etc have not done too well but I would bet more on consumption than capex this year as a theme.

Take on Way forward

Most people make the mistake of doing sector-wise diversification. I think what one should do is time-wise diversification. There are short-term plays, there are medium-term plays and there are long-term plays. Look at those companies which export to the US. IT companies may be affected by global de-growth but will pharma companies be affected? No. Therefore you have to select those which are more secular stories. Buy selectively in IT and pharma. Go for private banks. So I think this would be my greatest plays. I would avoid FMCGs because of a mixture of obvious valuations and pricing power and competition and so on. So for the short term, look at secular plays which have been affected not by the economy, but by the flight of money.