In the past year, the Indian financial market has proven its buoyancy. Indices have been soaring; Nifty is up by approximately 55%, while Nifty Midcap and Small cap are up by nearly 80%.
We entered the pandemic when the GDP growth was at a 15 year low. The corporate profit to GDP in FY 19-20 was at 1.9% (despite previous year tax cuts), which is significantly low of what we ought to earn at corporate India. Many sectors were barely coming out of cyclical downturns or bad patches, like automobile, real estate, financial institutions, etc., and then the pandemic hit.
ETFs are passive funds, it eliminates stock specific risks. No additional risks are involved beyond systemic risks. ETFs have all the characteristics of an Index Fund. Although, unlike ETFs, Index Funds cannot be traded at real-time prices; thus we concur that if an Index Fund could get listed on an exchange that’s precisely what an ETF is. It is designed to mimic the gains of a specific index. The benefit of real-time trading, along with the gains of passive investing is what ETF brings to the table.
Low-interest rates: An unprecedented amount of liquidity continues to prevail in the markets over the past 18 months. We have had favorable interest rates floating in the markets since Feb 2019, and Banks are flushed with liquidity.
Low-interest rates are key to:
- Accelerating demand, especially for high ticket consumption and rate-sensitive discretionary products.
- Reducing corporate debts and increasing corporate cash flows.
- The PE multiples are inverse of interest rates. So as the cost of capital deflates, equity inflates.
Favorable Housing Revival: In the last five years, the home loan rates have reduced by 300 basis points from approximately 9.7% to 6.7%. Real estate prices have corrected over the past few years. The reduction in interest rates, prices on high-value real estate, and the increase in incomes over the past few years are driving consumption. The revival of the housing sector has positive implications on the economy, benefitting sectors like raw materials, financing NBFCs, construction equipment, etc. Which further leads to generating employment and propelling business growth.
Acceleration in Manufacturing: China’s increasing labor rates over half of the last decade, their tussle with the USA, and their lapse in recognizing steep environmental challenges faced are causes for manufacturing opportunities worth over $300 billion to move out of China. The Indian government is capitalizing on this opportunity. The advantages:
- Favorable demographics in India will keep labor costs competitive for another decade.
- The government has rolled our Production Linked Incentive (PLI) schemes for approximately 13 sectors and lowered tax rates.
- India has a vast and favorable consumer market for certain imported products (like mobile phones).
Consolidation that strengthens: India has seen various reforms and challenges over the last 4 to 5 years with demonetization, GST, NBFC crisis, and then the pandemic. These reforms have affected the unorganized sectors tremendously. We have seen an example of this play out in the consolidations of private and public sector banks, which have strengthened the more significant private player’s overall market share. Similar consolidation has occurred across sectors where the unorganized sector has been marginalized while the stronger players in the organized markets have grown leaps and bounds.
Sector-specific factors: Certain sectors have grown tremendously with accelerated growth propelled by the pandemic. The IT sector is one example, the need for robust technological advancements across sectors increased their demand, and their favorable working culture could match the market with supply. Other sectors that have revived are Metals, Telecom, Pharmaceutical, etc.
The market earnings before the pandemic were flattish. There has been a steep rise in earnings and profitability across sectors during and post-pandemic, especially as seen in the Nifty valuations.
At an aggregate level, India’s earnings growth for FY23-34 is intact, and the market outlook is positive, making it a favorable market to invest in for the long term.
Factors that could hamper the projected growth:
- The possible return of the third wave, which could be worse than the second wave.
- External factors like change in China+1 or oil prices.
- Abrupt increase in rates in the real estate sector could affect demand.
India’s growth story is projected to grow at 6.5% to 7% in the coming years.
Drivers and Enablers for Long Term Growth:
- India’s median age is below 30, a favorable demographic age that could continue for a couple of decades until 2050.
- The millennial savings and spending patterns are favorable to that drive further growth.
- Urbanization is underway; the nuclearization of families is seen in the population growth by 16% compared to the number of dwellings which have increased by 29%.
- The combination of PLI and gig-economy will increase on-demand job requirements and could lead to 9 crore jobs in the market. We need 8.4 lac jobs per month over the next decade, which will be the most crucial driver for growth in the Indian economy.
- National infrastructure Policy has laid out 110 lakh crore to be spent over a 5-year window.
- Developments are already seen in water, electricity, metro connectivity, coastal road networks, and more.
- The housing sector is reviving slowly but surely.
- The JAM architecture of mobile-Aadhaar linking has played a vital role in the easy roll-out of vaccination drives.
- Our UPI program is a case study worldwide, P2P transfer at zero cost is India’s globally acclaimed asset.
- Cumulative reforms like GST, Rera, Corporate Tax Cuts, PLI, etc., will enhance structural growth in the coming years.
- Jal Jeevan mission to provide 19crore households with clean drinking water, which has already reached 5 crore homes, is on its way to completion by 2024.
The drivers are intact. Valuations for sectors like BFSI, Consumer Durables, Pharma, Insurance, and Healthcare are reasonable. IT, Metals, FMCG and Chemicals are valued higher but can grow further.
For a quarter or a year, equity earnings could be volatile, but from a 3 to 5-year perspective, investors with reasonable expectations from the market could see the benefit. Investors should invest those funds in equity that can be locked in for a period of 2 to 3 years at least. Most well-managed funds over the last decade have delivered 15% returns despite significant macro challenges, including the Lehman crisis and the pandemic.
In the near term, investors can expect volatility, but from a 3 to 5-year perspective, an optimal asset allocation, balanced risks, and disciplined investing style can offer investors higher (roughly 12%) returns.
Business – Look for capital-efficient businesses that offer longevity and a sustainable competitive advantage. Companies that have ROCEs of around 15% and further growth opportunities are vital for sustainability.
Management – Quality of management is the central thread that differentiates winning businesses from others. Integrity, intellect and energy in that order must be seen in top management. Thought leadership for progressive growth and good governance must move in tandem with each other.
Valuation – The estimated value of the business should be greater than the price; this ensures market corrections do not essentially affect your investments. With valuations at an all-time high, you may end up paying a bit more for some businesses. It is acceptable if you are looking at holding such investments for the long term. Keep in mind all other factors like business and management are intact before you invest.
Portfolio – A core and tactical approach is necessary for building a stable portfolio. A portfolio constructed with investments spread across sectors and asset classes will offer maximum diversification to withstand intermittent volatility and offer stability.
Avoid being carried away by the noise and short-term volatility of the market, maintain discipline in investing and follow the above investment philosophy to generate decent returns.