Markets have been doing well as I have expected over the last several months. I have been bullish since the time of Budget 2016 and demonetization was an opportunity to pick up high quality stocks rather than sell them off. While most people keep on focussing on trying to identify the “MARKET TOP” and are obsessed by try to time the same the story changed drastically for India as Nitish Kumar walked with Narendra Modi. Those who cannot recognize the importance of the same will look like fools a few years from now.
Overbought markets, liquidity driven rally, a rally without fundamentals, PE ratio of 24-25, Fed Concerns, Brexit Concerns etc dominate “Expert” commentary. Most miss the point that the rally is driven by improving economic prospects without inflation which is the “Goldilocks” scenario. Will it last for a long period of time or is this a passing phase is the question most should ask. The probability that this could last for a longish period of time is quite high as the biggest driver of Inflation over the first decade of 2000’s was the runaway rise in Chinese consumption of raw materials where the output failed to keep pace. Today with a slowing China and below trend growth across most major economies the probability that inflation will come back in a big way is actually very less.
The biggest call that investors into equities need to take is on oil prices. With the oil cartel be able to hold prices at a time when peak oil consumption seems to be around the corner given the research around battery driven cars and growth of renewals like Solar Energy at extremely competitive prices. I will not spend too much time of this but my view is that Oil will be rangebound for a prolonged period of time.
Fed fears, how they will handle unwinding of the huge $ 4.5 trillion balance sheet will be something which will keep the “Experts” jittery and is good for us. Why people think that suddenly the market will start falling one day is something that is totally beyond me. Yes there will be jitters in between, yes there will be sharp and sudden corrections but this does not mean that the move will end.
From the Indian context, politically what has happened over the last one week is very significant in the context of political stability and more importantly policy stability over the next 5 years. The opposition is in shatters and it will be tough for them to regroup over the next 18 months. With most dramatic of policy decisions like GST and Demonetization behind us we will see more of a work towards appeasement in one way or the other entering into the last phase of 2018. Tax rates will be cut for sure as GST stabilizes and government revenues get a boost.
As the government focuses more on growth and employment we will see multiple levers of growth over the next couple of years. Most management commentaries today indicate that the general view that we are now at an inflexion point for growth. While we have great macroeconomic stability today with low inflation, a stable currency and a stable external scenario the micro picture has not been very supportive with growth eluding many industries and sectors like PHARMA and Technology facing their own issues related to slower growth and pricing pressures. The bad assets issue of corporate banks has also been a drag on the economy and restricted growth due to lower credit growth and lower investments as stressed corporates have been unable to invest further. Telecom and Power continue to remain stressed sectors.
On the other hand lower interest rates have now started percolating down to interest costs of corporates. Most companies are also leaner and as such a pickup in growth will lead to much faster profit growth over the next two years.
However the bigger theme is going to be that valuations will sustain at higher levels as investors will be convinced that the government will work towards higher growth will reduced levels of corruption. As the tax base increases and growth comes back we will see improvement in government finances which will again be positive for Macroeconomic stability. Most people will keep on harping on historical valuations and comparisons thereof. Factually India has never had such low consumer inflation, external stability and political stability as a combination ever ( or as far back as I can see). The question then is that till when do we ride the equity wave? My guess is till 2022 or 2023 will be a good time period. Eventually the government will lose focus as they continue in power for a long period of time and there might be again a time of change. (A hope now but that’s a likely scenario)
So what do investors do? Investors should use any opportunity where high quality stocks are available cheap due to sudden market falls and add on to their positions. On top of that some amount of thematic bets should be taken at various periods of time to ride the wave, like Sugar from 2015-2016 and metals from 2016-2017. Thematic bets might not be long term bets but add to returns. It is also important to identify a few good established companies that are doing things today which can reshape future growth in a manner which is higher than the past and leads to rerating.
The wave is a long wave. There might be dips of even 10-15% in between but will be opportunities to buy big rather than sell and regret.