The month of May saw the markets continue with the momentum of April and the rally became more broadbased. Annual results season tends to create volatility around results of specific companies which is something we cannot escape, however in many cases where the longer term outlook is good any bad result creates buying opportunities. During the month the Nifty went up by around 3% and the Midcap Index went up by around 6% as I write . We also saw the Nasdaq move to new multi month highs and a majority of European Markets to new highs.
The growth outlook for India continues to be positive with the peaking of inflation and interest rates. Consumption demand has been slow due to high inflation and that was reflected in company results. However, the capital expenditure cycle continues to trend higher and that is driving the performance of companies in the capital goods, construction and infrastructure segments. As inflation subsides, we will see consumption also come back running into the festival season in the third quarter. The growth outlook for India which was running at 6-6.5% for this year has got upgraded to nearly 7% across most economists.
The improvement in growth outlook when the growth outlook for a majority of other large economies is subdued or is being downgraded should not be disregarded and will create a large flow of foreign investor money into India both in terms of FDI and FPI flows. This is a critical factor that investors should not disregard. In my view investments into India both long term as well as portfolio flows will be very strong over the next two years. On top of that we have domestic investors continuing to invest regularly in the markets. As these flows get complemented, we will see significant wealth creation in the stock markets.
The other big factor has been the huge investment cycle across large industries. Roads were always a big driver of infrastructure investment. Over the last 2-3 years we have seen Railways join in along with the big opportunity that defence indigenization represents. We have already seen huge order flows from railways due to rolling stock investments, Vande Bharat Trains, track upgradation as well as station redevelopment. Defence indigenization is now becoming mainstream and will be a good opportunity for both public and private sector companies. The China plus policy is also leading to manufacturing shifting to India and the biggest example of that is what Apple has done. The various PLI schemes are also driving investments and production in India and is also leading to import substitution. Metro projects have been taken up in many cities and planned in many other cities.
The real estate sector is also seeing a good revival which tends to be usually positive for economic growth. I have also written several times in the past few months the fact that the value of the clean balance sheet of Indian Banks and NBFC’s and their huge capital adequacy and profitability in driving economic growth should not be disregarded. A strong banking sector forms the bulwark of rapid economic growth which is present in India today. Public Sector Banks that relied on huge government support to meet the minimum capital adequacy requirements till a few years back cummulatively made a profit of Rs 100000 Crores last year.
The other big advantage India as an economy will have over the next few years is going to be the rapid decline in growth potential of China. Contrary to India China has a huge number of zombie banks and real estate companies. Over investment has led to a reduced potential of fixed asset investment driving growth. We are also likely to see rapid population decline in China which will reduce growth potential further. The China plus one policy will also reduce growth potential in many industries in China. The biggest advantage I see out of this is low pressure on commodity consumption which will keep commodity inflation low. Most people do not know that China constitutes 50-60% of the worldwide consumption of most major commodities. As their consumption slows and declines there will be enough of surplus available for rest of the world and prices will remain subdued. This is a risk for global investors as well as an opportunity
As the interest rate cycle peaks out in most parts of the world we will also see more liquidity flows start into economies which present higher growth opportunities. Some of it is already visible. Cash positions of global money managers continues to be at record highs and to that extent there is enough money on the sidelines.
In terms of market valuations, we are now trending above long term average valuations. Many times, you read and hear about long term Nifty Valuations and current valuations. While it is relevant it is not something that’s cast in stone. Typically, in accelerating growth cycles valuations will go above long term averages and vice versa. I would be of the view that over the next two years valuations will remain above long-term valuations. A year from now we will have the Lok Sabha elections which could be a period of uncertainty and we will watch that from a tactical point of view. Strategically the India story should remain strong. The approach to investing has to be value with growth, avoiding crowded trades and picking out opportunities to Buy. In the very short term, a delayed monsoon might create some panic among short term traders and provide opportunities to long term investors. A good opportunity to deploy big capital came in March and will keep on coming periodically.
Markets will be much higher 12-18 months from now.