‘Equity markets reward patient investors’
It is tempting to make a case for being underweight on equities after what has undoubtedly been a big move, but I remain optimistic. For all the pain that came with Covid, there were gains too for the economy. Low oil prices are likely to save US $25 billion in 2020-21 and India is likely to be current account positive after 16 years. The push that Covid gave to the shift of manufacturing away from China could improve India’s GDP growth by 1-2 percentage points per annum for many years. The icing on the cake is the tsunami of liquidity at never-seen-before rates, which has propelled the affordability of homes in India and ignited hope for the perpetually capitalstarved infrastructure sector.
Equities are slaves not just of earnings but also of the cost of capital. Every 1 percentage point decline in cost of capital increases the fair value by around 10 per cent. Seen in this light, Indian equities are not as expensive as some believe.
The averages hide more than they reveal. While the Sensex in end-december 2020 was at around 2.3x its December 2007 levels, the FMCG index was at 4.7x, the PSU index was at only 0.6x, and others were in between. The divergence in sector valuations is near an all-time high. This market is very expensive in some pockets, dirt cheap in some, and its belly is reasonably valued.
While the markets are hard to forecast in the near term, in equities patience is rewarded over time. As and when interest rates move up in developed markets, there is a risk of equities selloff there, which could trigger a correction here as well. Be prepared to ride out such occurrences.