Post the elections, Indian equity markets touched an all-time high in the beginning of June. However, after announcement of the Union Budget for FY19-20, the largecap Nifty index is down 10%, while the midcap and smallcap indices are down 13-16%. There are growing concerns regarding a slowdown in consumption, especially in the Auto sector. Contrary to market expectations the Union Budget did not provide a booster dose for the already slowing Economy especially after the IL&FS Crisis. Imposition of Tax/surcharge on Ultra Rich & FPIs reversed the positive sentiment from High-Hopes post a strong mandate to a negative one.
Though few measures were announced to address liquidity situation, but current situation requires a bigger and targeted stimulus for reversing the sentiment especially when the Global markets have entered a correction zone. Though as a market participant one may feel that ability to do something big for the economy is missing with GDP growth rates showing no signs of even stabilization, we should also remember that under this Government bold measures like Demonetization, Implementing GST, Triple Talaq and now revoking Article 370 of J&K were done. Govt. seems to have realized the magnitude of Stress and is meeting Industry experts for possible solutions. Generally, realization of problem itself is a solution. We have seen time and time again that the market sentiment rarely is in a neutral zone and keeps swinging form extreme optimism to extreme pessimism. This swing is generally good for investors, as one of the world’s renowned investor says, , ‘It’s only when the tide turns, we know who was swimming naked’. During these tough times the business model of companies goes through a test separating Men from Boys.
An eminent American investor and writer, in his recent newsletter says, it is important for investors to keep up with current developments and those that will shape the future. But it’s also essential that they not completely unlearn the lessons of the past. Reminds of a famous quote ‘History doesn’t repeat itself, but it does rhyme’. So, in the current environment of uncertainty both locally & globally, the best strategy is to follow the basic rules of Investment and hug companies that have the potential to emerge stronger post this crisis.
View on the Market
We have seen sizeable FPI outflows in July due to an increase in the tax surcharge for some of the FPIs which has impacted sentiment. Global risk-off due to re-emergence of trade-war is further affecting the currency market and equity markets, but one must keep in mind that India’s trade share is quite low as compared to other major Geographies. The US Fed has reduced its policy rate and commentary from other central banks has also been dovish. This tit-for-tat easing between major central banks has the potential to depress global yields and drive fund inflows into emerging markets in search of yields. We have seen global PE majors (like Blackstone) buying commercial real estate in India in search of yields. Global crude price has also softened on glut of shale oil and talks of China buying Iran oil which improves India’s Current Account Deficit.
Domestically also, we are currently in an environment of easy monetary policy. The RBI has already cut its policy rate 110 bps so far this year and there are expectations of further rate cuts going forward. Hence, even as we face some near-term issues, lower rates may aid an economic recovery in the medium term. Having massively underperformed the global markets in recent past, any economic reform by Government has a potential to ignite bullish sentiment and awaken animal spirits in investors as well as businessmen; thus helping markets scale new heights.
And we know, post triple talaaq and article 370 that this Government has got the guts to act decisively. Also, Indian bond yields have softened in the recent past and earnings yield of equity has gone up with steep correction in stock prices (even after future earnings estimates getting revised downwards). We seem to be around the inflection point looking at the yield gap.
The best investments often are made in times of fear and depression. While market performance and returns could be modest in the near term due to current headwinds, liquidity flowing back into the system combined with the money multiplier effect may lead to an economic recovery and improvement in earnings. If we see resolution of some large NBFCs in the next few months, confidence will start coming back. Once we start seeing positive news flow, it has the potential to trigger short squeeze in the market and fresh allocation towards equity.
India’s structural growth story remains intact (demographic dividend) and has been reinforced by the progressive reforms initiated by the government. We remain constructive on Indian equity market outlook from medium to long term. Investors may continue to gradually build their exposure to equities, especially through SIPs, and maintain proper diversification across asset classes.
We believe a suitable strategy for investors in the current environment is to invest in funds that own high quality companies with strong parentage and avoid companies that have excessive business uncertainty/leverage. Our endeavor remains to hunt for consistent wealth creators which possess significant economic moats (brand recall, technology, global parentage) and provide better earnings predictability and sustenance across business cycles.
One of the world’s renowned investor said ‘Rule No. 1: Never lose money; rule No. 2: Don’t forget rule No. 1.’ Focus on quality stocks always pays off in the medium to long run. Investors should use mispricing of stocks in these times to one's advantage for building an investment portfolio.
(Source: Bloomberg, ABSLAMC Research)
With key inputs from Vinod Bhat and Girish Patil.
FPI: Foreign Portfolio Investors; GST: Goods and Services Tax; J&K: Jammu and Kashmir; PE Private Equity; US Fed: US Federal Reserve; RBI: Reserve Bank of India; NBFC: Non-Banking Finance Company
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