MON­DAY MAR­KET Sensex may touch 45,000 in 5 years on GDP growth & re­forms

Financial Chronicle - - INVEST -

Ro­bust eco­nomic growth, re­forms and pri­vati­sa­tion will drive the Sensex in 2018 and be­yond. The mar­ket will re­act pos­i­tively with im­prove­ment in earn­ings, growth in GDP and move to a fur­ther level, high from now on­wards, said Rahul Agar­wal, di­rec­tor, Wealth Dis­cov­ery, in an in­ter­view with Ritwik Mukherjee. But global fac­tors con­tinue to play in the In­dian mar­ket. Dol­lar strength­en­ing with the US cor­po­rate tax cuts and ris­ing com­mod­ity prices could be some of the risks that the mar­kets would face in the near term, he added. Ex­cerpts:

2017 was marked by sev­eral pol­icy de­vel­op­ments, in­clud­ing DeMo and GST, which had sig­nif­i­cant im­pact on the In­dian econ­omy, in­clud­ing the equity and cap­i­tal mar­ket. As we have just stepped into 2018, how do you as­sess th­ese im­pacts? Soon af­ter de­mon­eti­sa­tion, the In­dian equity mar­ket re­acted sharply. There was an en­vi­ron­ment of un­cer­tainty as to how the econ­omy would re­act to this shock. But one year since then, the mar­ket is up 22 per cent, mostly on the back of huge fund in­flows from the do­mes­tic in­sti­tu­tional in­vestors. There is an over­all pos­i­tiv­ity as re­flected in the mar­ket re­turns that de­mon­eti­sa­tion would lead to more parts of the econ­omy com­ing to the or­gan­ised sec­tors, which would ex­pand the GDP base. The trend has been re­flected in the lat­est GDP num­bers, which have shown a turn­around af­ter 5 quar­ters of neg­a­tive growth. De­mon­eti­sa­tion has led to a curb on the black money and a spurt in dig­i­tal trans­ac­tions. All th­ese are huge pos­i­tives for the econ­omy and are get­ting re­flected in the mar­ket re­turns.

The bond mar­ket was also im­pacted… Last year, the In­dian fi­nan­cial mar­ket bore the brunt of the US pres­i­den­tial elec­tion re­sult as well as scrap­ping of around 80 per cent notes in cir­cu­la­tion. The im­me­di­ate im­pact at the end of Novem­ber 2016 was that In­dia’s bench­mark 10-year bond yields had dived 36 ba­sis points to 6.44 per cent, a 7-1/2 year low. Sur­plus liq­uid­ity in the bank­ing sys­tem has low­ered yields of G-secs. Yields have risen since Septem­ber 2016 with firm­ing in­fla­tion that low­ers the chances of fur­ther rate cuts by RBI. In Septem­ber 2017, the 10-year bond yields was 6.73 per cent.

Banks and bond mar­kets were in­deed the key ini­tial ben­e­fi­cia­ries but im­pact of de­mon­eti­sa­tion is wear­ing off as we com­plete one year, es­pe­cially so in the bond mar­ket, with the 10 year bond yield at around the same level as it was be­fore de­mon­eti­sa­tion.

What about gold and MF mar­kets? At the stroke of de­mon­eti­sa­tion a year ago, sig­nif­i­cant amount of gold was sold to pur­chasers scram­bling to con­vert their cur­ren­cies at hand (which were about to turn in­valid) into gold. The gold rush was so strong that many jewellers sold what­ever they had on show­case and were left al­most empty. A cou­ple of months later as the re­mon­eti­sa­tion gath­ered pace, gold buy­ing caught mo­men­tum largely as an in­ven­tory build-up at the whole­salers and jewellers end.

Af­ter this was the GST scare, which led to ad­vance­ment of gold buy­ing by jewellers to build in the in­ven­tory and con­sumers as well. This was done to take ad­van­tage of the low tax rates be­fore the feared high rates un­der GST kicked in. As GST rates were not pro­hib­i­tive as feared has led to de­mand stay­ing rel­a­tively buoy­ant. In­dia im­ported nearly 132 tonnes of gold af­ter GST roll­out.

Sur­pris­ingly, de­mand has not fal­tered de­spite higher buy­ing ear­lier in the year. There was a view that de­mon­eti­sa­tion would sig­nif­i­cantly re­duce gold pur­chases but that hasn’t hap­pened. Rather, we are see­ing sig­nif­i­cantly higher de­mand this year against the year be­fore de­mon­eti­sa­tion. In­dia im­ported about 640 tonnes in the first three quar­ters of 2017 against 510 tonnes in 2016. Clearly, de­mon­eti­sa­tion has failed in many of its agen­das, in­clud­ing im­pact on gold.

Be­fore an­nounce­ment of de­mon­eti­sa­tion, the mu­tual funds in­dus­try was hit­ting new as­set un­der man­age­ment (AUM) records al­most ev­ery month, and in­dus­try ob­servers an­tic­i­pated pos­i­tive growth as far as the eye could see. Along with that op­ti­mism, de­mon­eti­sa­tion helped the in­dus­try at­tract more in­vest­ments. While over­all AUM has grown by 25 per cent since Novem­ber 2016, which was al­most same for prior 11 months, equity AUM grew 36 per cent dur­ing the same pe­riod against growth of 19 per cent. This AUM growth is be­cause of two things: an in­crease in gen­eral mar­ket lev­els (which pro­pels the value of in­vested as­sets), and new in­flows from in­vestors.

With the ad­vent of 2018, there are new hopes and ex­pec­ta­tions. What’s your take? Fun­da­men­tally, we are turn­ing a cor­ner in terms of eco­nomic and earn­ings growth. The De­cem­ber quar­ter earn­ings will see a pick up on the back of a re­cov­ery in en­vi­ron­ment and a weak base from the last quar­ter. The mar­ket will re­act pos­i­tively with im­prove­ment in earn­ings, growth in GDP and move to a fur­ther level high from now, but global fac­tors con­tinue to play in the In­dian mar­ket. The strength­en­ing dol­lar with the US cor­po­rate tax cuts and ris­ing com­mod­ity prices could be some of the risks that the mar­ket would face in the near term.

What are your main con­cerns about the mar­ket at this point of time? Ris­ing crude prices, strength­en­ing of the dol­lar and ris­ing com­mod­ity prices are some ma­jor con­cerns. Th­ese would put in­fla­tion­ary pres­sure on the In­dian econ­omy, hence re­duc­ing any chances of fur­ther low­er­ing of in­ter­est rates, also the fis­cal deficit tar­gets that the gov­ern­ment has in mind could also come un­der stress thereby im­pact­ing the over­all mar­ket sen­ti­ments.

How are in­sti­tu­tions/FIIs look­ing at In­dia? The world econ­omy should grow mod­estly in 2018, but the In­dian econ­omy is slated to grow at a much faster pace. Af­ter 7.1 per cent growth in 2016 and a pro­jected 6.7 per cent uptick in 2017, the In­dian econ­omy is ex­pected to grow at 7.4 per cent next year. The In­dian econ­omy and mar­ket are be­ing looked favourably. The In­dian growth rates are su­perla­tive to any emerg­ing mar­ket econ­omy and both de­mon­eti­sa­tion and GST im­ple­men­ta­tion are struc­tural re­forms that would have long-term pos­i­tive im­pact on the econ­omy and that’s the view that most FIIs and in­sti­tu­tions have of In­dia.

Are there op­por­tu­ni­ties in the cur­rent mar­ket? While eco­nomic risks linger and more re­forms are needed, In­dia will be the fastest-grow­ing ma­jor econ­omy the IMF tracks. Over­all earn­ings of In­dia Inc are ex­pected to be around 15 per cent for FY19. There are am­ple op­por­tu­ni­ties. The econ­omy is on the path of long-term sus­tain­able growth. The mar­ket would be the di­rect ben­e­fi­ciary of it.

Where do you see the mar­ket 5 years down the road? Eco­nomic growth and gov­ern­ment re­forms will be the theme of the mar­ket for the next one-year. It is ex­pected that Sensex may be in the range of 45,000 in the next five years, driven by eco­nomic growth, re­forms and pri­vati­sa­tion.

Which sec­tors would you bet on at this point of time? The mar­ket is un­likely to break out in a hurry and sec­tors that did well so far could un­der­per­form in the next oneyear, while the beaten-down sec­tors like PSBs, met­als and in­dus­tri­als will re­main in de­mand in 6-9 months. Af­ter re­cap­i­tal­i­sa­tion, both PSBs and pri­vate banks look es­pe­cially good to us fol­lowed by ce­ments and steel as we see them as di­rect ben­e­fi­ciary of ma­jor in­fra­struc­ture push by the gov­ern­ment.

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