Long-term growth prospects hold India in good stead

There are many things which investing can be compared with and the cliched comparison with mountaineering happens to be one such analogy. In fact, apart from mountaineering, the only walk of life where one is as fascinated with peaks, if not more, is in the world of investing. Understandably, Sensex scaling Mount 75k for the first time yesterday has grabbed the attention of the investor fraternity. Goes without saying that the potent combination of corporate profitability, liquidity (domestic and foreign alike), and positive sentiment driven by structural growth has played a part in Indian equities scaling new highs, even as the rest of the world has, at times, painted a gloomy picture. Unlike mountain peaks though, equity all-time highs are nothing but numbers, which don’t seem too lofty after a few years. Consequently, the path ahead is what is more important than the one travelled thus far.

While there are numerous reasons why Indian equities have done well, three key reasons do stand out. Firstly, India’s strong macroeconomic fundamentals, structural reforms and long-term growth prospects hold India in good stead. Secondly, India has a large number of companies with a wide array of businesses catering to a diverse set of customers. With high quality management, strong corporate governance, emphasis on capital efficiency, robust regulatory framework and wide array of investment avenues, Indian equity market can live up to its billing of being a ‘Stock pickers paradise’. Thirdly, sustained domestic liquidity now makes Indian markets relatively less susceptible to volatility associated with foreign capital flows. While foreign capital will continue to hit Indian shores, robust domestic flows from DIIS (Domestic Institutional Investors) can provide counterbalancing stability.

The framework to look at the equity market landscape involves evaluation of 4 factors viz. macro fundamentals, corporate profitability, valuations and liquidity/sentiment. Strong fundamentals, rising corporate profitability and a bullish sentiment on India imply that the long-term prospects look good for Indian equities. However, valuations are stretched in certain pockets of the market. Equity returns are ultimately a function of earnings growth, dividend yield and change in valuations. Given the current valuation landscape, going forward, equity returns are expected to be in line with earnings growth.

Investor sentiment is like a pendulum that swings from extreme optimism to exaggerated pessimism. In the short run, equity markets are bound to be volatile, especially against the backdrop of the prevailing global environment and the upcoming general elections. However, in the long-run, equities do track corporate profit growth and investors would do well to remember this. One oftenoverlooked fact about India is that historically, its economic growth and rise in corporate profitability have reflected in equity returns. Something which cannot be said about economies like China, where equity returns have been lackluster in spite of robust economic growth. With a long runway of economic growth ahead of us and increasing financialization of savings, investors with a longterm horizon and disciplined approach could reap the rewards of India’s Amrit Kaal.