Equity Markets – The new ‘Gold’!
A couple of months back, there was mayhem on the perception of an economic slowdown with extreme pessimism across the nation as multiple television debates fueled it further. However, the recently published strong economic data has shut the mouth of critics as the economy seems to be reviving post demonetisation and GST, which is extremely encouraging. Markets the world over are hitting record highs. Last week, Japan's Nikkei recorded a new high since 1996 followed by the US, European and Brazilian markets. The Indian markets, too, touched record highs. The Rupee also remains strong against the USD on the back of robust IIP data for August and lower retail inflation of 3.28% for September 2017. Exports registered a healthy growth of over 25% in September to $28.61 bn as all major commodities also recorded growth. Core sector output grew to 5.2% in September.
Many analysts who were bearish earlier have turned positive on the economy and the equity markets after the release of the latest economic data. However, I have constantly maintained my bullish stance on the economy and the equity markets for long now in view of the solid structural changes that the government is carrying out. This is proven by the fact that India’s ranking in ‘Ease of Doing Business’ released by the World Bank has improved substantially by 30 ranks to 100. In view of the various reforms, the bull-run in the equity markets is likely to remain intact going forward but consolidation and minor corrections in between are not ruled out.
The festive season witnessed good retail spending which will further boost the economy. The earnings season is the next booster for the economy as Maruti Suzuki, Hindustan Unilever and HDFC initiated a splendid start to this season. The trade deficit, too, narrowed in September by 0.95% to $8.98 bn as the import growth rate was slightly lower than the export growth with gold imports declining 5%.
The government's surgical strike on black money is also bearing results with an enlarged tax payer base and higher tax collections. Personal tax collections grew 21.4% in 2016-17, the highest in the last 9 years, while overall tax collections grew 14.5% touching Rs.8.49 lakh crore-the highest in the last 7 years!
To further fuel the growth and reduce the impact of GST and demonetisation, the FM announced Rs.2.11 lakh crore of recapitalization for PSU banks to help them lend more. This is a real growth booster for the economy and for the banking sector. The markets gave a big thumbs up to this announcement last week as the Sensex and the Nifty touched record highs the next day. The earlier announced Rs.70K crore recapitalization package was felt to be inadequate by many, which is why the government allocated a sufficiently large recapitalization package this time. While the common man might feel that this is a ‘good money chasing bad money’ kind of phenomena, this was a long awaited reform for the Indian banking sector and the economy, the effect of which will be seen only after a couple of years. This will enable PSU banks to lend more, which will lead to industry growth and job creation. While everybody is concerned about its impact on fiscal deficit, FM indicated that 64% of the recapitalization amount i.e. Rs.1.35 lakh crore will be in the form of recapitalization bonds and the balance through budgetary allocation and the market. The government made a smart move by using the recapitalization bonds route whereby it will issue additional equity of the banks that can help them raise more capital from the market as well. To curb the impact on fiscal deficit, the government may use another set of PSUs to issue these bonds instead to avoid any shelling out of money directly without putting the fiscal deficit target in jeopardy. This is probably one of the best moves by the government to put the Indian economy back on the growth trajectory. However, it is important to note that such a bailout will not be appropriate as an on-going basis and the government must take stringent steps to curb such hefty stimulus in future. Recognizing this fact, the FM also announced that this move will be followed up by reforms in the banking sector.
Indian household savings have witnessed some massive structural shifts of late. Demonetisation seems to have boosted household savings. Households in India have historically been quite risk-averse and wary of investing their savings into risky assets. Traditionally, Gold was always a preferable asset class for the Indian middle class. However, this trend seems to have changed in the last few months especially post demonetisation. Earlier, the Indian stock markets were heavily dependent on FII inflows. But since the last one year, the Indian markets have inched higher despite lower FII inflows. The Nifty advanced from the 7900 level in November 2016 to 10300 in October 2017. The primary reason for this 30% appreciation is the change in people’s mindset as mentioned above. DIIs were net buyers over this period and Mutual Funds witnessed record inflows from investors on a monthly basis. This clearly indicates the rising interest and awareness about the equity markets and Mutual Funds. The key reasons for this shift in mindset are the contained inflation which helped the RBI to lower the interest rates (resulting in lower rates on bank deposits) and the downturn in the real estate market, which in turn pushed investors to look for other asset classes like the equity markets for better returns. And the markets have rewarded investors significantly. Assets under Management (AUM) by Mutual Funds recorded an all-time high of over Rs.17.5 trillion by end-March 2017, which further increased to Rs.20 trillion by end-July 2017. Gross savings grew to 11.8% (provisional) of GNDI (gross national disposable income). All these changes make equity asset class attractive for investors for the next few years and investors should take advantage of this opportunity.
The Indian economy is at an inflection point and is expected to remain on the growth trajectory buoyed by the government’s push for reforms and strong economic parameters. Equity savings in India as a percentage of financial savings even today is very low at around 5-6%.
But the Indian investor shifting gear to the equity markets from other asset classes is very encouraging.
India is well placed on the macros such as inflation, fiscal and current account deficit and the government is rightly working on the supply side constraints, which augurs well for the equity markets in the long-term. Although the market is fairly valued now, the fundamental strength of the Indian economy and sustained liquidity in the market will help the equity markets hit new highs in coming years. A systematic investment strategy in equity with the right set of fundamentals can fetch investors multibagger returns in the coming years. Happy Investing!