Eq­uity Markets – The new ‘Gold’!

Money Times - - Equity Markets – The New ‘Gold’! - By Laxmikant Bhole

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!

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.