TRUMP OR NO TRUMP

The stock markets have held on pretty well over the last many months amidst a flurry of news flow which have been perceived to be negative. There have been threats around North Korea, French Elections, Brexit again and again and now issues related to the US Political turmoil. As the newsflows have accelerated the markets have shown very strong resilience. The reason is very simple, markets are a slave of earnings and earnings are improving.

I have never seen so much scepticism in the markets when markets are trading at all time highs in most parts of the world. Experts have been calling for a market crash and an end to the bull market for months now. However the markets have continued to rally. The reason for the same is an improving Global Economic outlook. The big fears around the collapse of Euro zone have now taken the backseat where post Brexit we now see more and more countries veering to the Centre.

S&P companies that have reported till date have seen an earnings growth of a huge 15.2% with a huge majority of companies beating consensus. We have seen a similar phenomenon in India where except for sectors like Telecom and Technology we have seen companies meet or beat consensus earnings. Markets have responded well to even those sectors that are not doing well where even stocks from these sectors now trading higher than where they were at the time of earnings release.

Globally inflationary expectations are well anchored with the fear of deflation at the backburner now but inflationary expectations also at low levels. This is sort of a Goldilocks scenario where the markets are absorbing the US Fed rate hikes, inflation is under control and growth outlook has improved. The earlier the sceptics recognize the better it will be for them.

Chinese economy fears keep on coming back every few months. However the truce by the US and China on the currency manipulation issue, an acceptance of lower growth by the Chinese leadership and some reduction in the bad loan stress there continues to support a soft landing rather than a hard one.

Specific to India we have seen CPI inflation come down substantially and is well below the expectations of the RBI and MPC, Growth indicators have picked up, the implementation of GST is around the corner, the INR is strong due to macroeconomic stability and improved growth prospects and there is the likelihood of a normal monsoon.

The capital expenditure revival cycle which many of us have been waiting for is also now looking imminent. Infrastructure investments have picked up and have become one driver of growth. On top of that we see sound bites coming from most of the Private Sector companies today that capacity utilizations are now at levels which would warrant further investment down the line. This is still something that is widely underappreciated in the analyst community.

Last year has been one of record FDI flows into India with the reported figures pointing at $ 60 billion. This should further accelerate going forward as growth picks up and ease of doing business improves post GST implementation.

I had expected a V shaped bounce back after demonetization and the scenario is panning out as predicted. The purchases were just deferred but not cancelled. In the current financial year we will not only see a revival in the investment cycle but also in consumer growth as rural and urban cash flows remain strong. One new driver of growth which has caught on very fast is the Affordable Housing segment where due to subsidies under the PM Away Yojna we now see a significant pick up in projects in this segment and a demand comeback atleast in lower end housing.

Strong domestic flows into equities have not only led to market stability it has also created a scenario where growth capital is now available to companies more easily than what it was a couple of years back. Without going into the merits of specific IPO’s a decent IPO cycle is good for the economy in general.

IN CONCLUSION

I believe that many people are too focussed on issues like that of the US President Donald Trump, North Korea etc etc which are just events in a market move. It is not that these events cannot create volatility; they can and should so that people do not become complacent. However the longer term equity outlook remains strong at this stage. There could be a summer correction but it will be an opportunity to buy rather than jump the ship and get away. Many have been advising exiting markets right from the time when NIFTY was 7200. They continue to do so even today. The reality is that if the growth cycle picks up the way it looks like then the Equity Rally in India has a long way to go.

One thought on “TRUMP OR NO TRUMP

  1. Kudos for predicting V shaped recovery when people were expecting a gradual U shaped revival, thanx to domestic flows. Hope we are not witnessing irrational exuberance. Not a bear but macro concerns like NPA mess, capex revival continue to bother us. Hope GST disruption and US rate hike do not spoil the current rally.

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