Bubble or not, the mid and small-cap segment have proven their resilience in these last few weeks. But, will this rally continue to maintain its pace in the long term?

Well! If only predicting the markets were based solely on number crunching and not investor sentiments, we could draw a logical conclusion. But, we all know it isn’t so. The answer to long-term predictability, though, lies in understanding the markets from a broader perspective. In the current scenario, a macro-economic standpoint combined with the future of the Government’s predictable actions can give us a sense of what is to come.

To understand this better from the standpoint of the equity markets, we invited an expert to share his expert opinion on the way ahead for equities. His nuggets of wisdom and passionate sharing of learning based on his entire career were refreshing, profoundly insightful, and full of wisdom, to say the least.

Here are a few highlights we would like to share:

The Covid Status:
Although India’s new infections and death rates surpassed the peak compared to the first wave (September 2020), the Infection to Fatality ratio has remained around 1% incrementally, proving commendable progress in India’s ability to fight the disease. In addition, there is a visible improvement in the availability of beds, oxygen, dipping of occupancy rate, thus indicating we have crossed the peak at least in metro cities. The apprehensions in terms of whether we were testing enough can be thwarted through data that proves India’s weekly testing rate is roughly 1% of the entire population marking us in the world’s top 10-15 countries.

The Vaccine Drive:
From a global outlook, the US and Israel’s vaccination drives suggest that the number of new cases drops sharply once the vaccination crosses a threshold of 40% of the population. According to data from India’s vaccine drive, 10% of entire population has received at least the 1st Dose; out of it, 35% of them are in the crucial age group of 45 years and above. Further estimates based on the future availability of vaccines suggest that India is expected to reach this threshold by late August to mid-Sep 2021.

Impact on markets:
Uncertainty of the current situation and fear of a 3rd wave will continue to cripple demand for non-essential goods and activities. While the overall consumer sentiments will continue to remain a bit subdued and fragile, we may not see a V-shaped recovery as we did post the first wave. However, stimulus support from Central Banks and the Government along with the drastic uptick in the vaccination drive could boost overall positivity. The fundamental drivers of our economy continue to remain strong:-

  • RBI has continued to support the economy by injecting timely liquidity and maintaining low-interest rates.
  •  GST collections have touched new highs.
  • Incremental CASA has somewhat improved due to discretionary spending and saving.
  • Government is likely to continue with its expansionary approach.

Indian stocks have been underperforming their global peers since the spike in cases due to the second wave, and yes, the markets are volatile as fresh cases spike occasionally. But market corrections of a 10-20% yearly fall is expected.

Sharing in-depth insight, our speaker highlighted data points of the last 41 years where only in 3 years the intra-year fall was less than 10%. Additionally, he highlighted how merely 9 times out of the 41 years, the market ended the year with negative returns. For the balance 32 years, the markets always staged a positive recovery at the year-end. So, a healthy correction is inevitable.

Market Insight:
In Q4FY21 the NIFTY Universe together delivered a PAT Growth of ~82% Y-o-Y, beating estimates as well as ~13% Q-o-Q. India Inc. has deleveraged significantly post shrinking profits due to the pandemic induced lockdown, yet the Balance Sheets, despite so much pain in the past few years, looks much healthier. A rise in metal prices has led to a robust cash flow in the metal sector. In the Cement Sector, the total debt of all the companies is around Rs. 10,000 Cr, whereas their Annual Operating Cash flows are pegged at approximately Rs. 25000 Cr. Half a year of this cash flow can take care of the industry’s entire debt, offering significant room for the next leg of growth.

As economic recovery progresses, history suggests those broader markets, including mid and small-cap companies’ will give far better returns in the long run. Of course, there will be volatility and cooling off in the near term, but in the long term, there is no denying that the earnings growth, especially this time around, will be much better and will reflect in the stock prices.
While the markets may contract and expand, the next decade will be a significant decade with tremendous growth opportunities for India.

A significant point our speaker highlights is:

In the next few years, India’s population will be 150 Crores. This rise will make India the most significant market on the planet for the next 100 years.

For the next 50 years, India will have the youngest population with an average age of around 29-35 years, creating an excellent consumption market regardless of the hiccups.

Over the next 15 years, India will be amongst the top 3 fastest growing economies in the world.

These undeniable statistics will put India on a growth trajectory that will be pretty unprecedented.