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