I think people will learn from their experience of October 2008. Yes indeed market corrected to 8,000 levels and even at 8,000 there were no dearth of people saying that it will surely go to 6,000. However, pretty soon it climbed back to 12,000 which was a 50 % jump from the bottom of 8,000. My guess is that, that experience will be still live in the memories of people. One never knows where the correction will end but hopefully remembering October 2008 we will not become as cheaper, as attractive in 2015 as we were in 2008 Advice to the retail at this point in time
On a five year basis, even in today’s market, most equity Mutual Funds would have delivered 10 % plus return and that is tax free. Now, it is not a good return to get in, in equity scheme but if inflation is running negative in a wholesale price basis and consumer price index (CPI) is 5 %, then 5 % real return is not that bad. As Governor explained, we have to look at the real return and not the nominal return. My recommendation to equity investors will be that yes, last two years have been brutal, we were all expecting market to do well. It has not done well but it has become now cheap. It has now become lower end of fair value. If you stay invested, there might be triggers going ahead which can support the market. Not that we will see an excessive rally in the market but certainly from this point of time, there is more upside and less downside.
Is that your fear as well that a post Budget sells-off is in the offing? Absolutely. The market will react to what choices we make in the Budget. If the choice we make in the Budget is related to let us say increased taxes, increased borrowing program, do away with capital gains tax on the stock market and so on and so forth, then surely market reaction will be negative. However, on the other hand, if the Budget takes into account the current status of economy and decides that it will monetize governments assets – like they have holding in SUTTI which holds three blue-chip companies, like they have so many lands and buildings which they can monetize. If the government makes a dream Budget like we had seen in 1997 then can the market take off? My feeling is that yes the market can take off. I don’t see a reason why we should assume that the Budget will be negative for economy. It might as well be the trigger for being positive to the economy. What if we take about one, two or maybe even more than two years for prices to recover to the levels that we saw in 2014? One, we require some amount of sanity in the global risk-off trade. Today, the market capitalization of a country like Brazil, Russia, they are lower than one large company in America. Can one company of America be bigger in terms of value then the whole country of Russia and Brazil which owns natural resources, which owns between 12 % and 17 % of worlds land mass? My feeling is that at some point of time rationality will prevail, sanity will come back. So, we require a positive situation from the global sell-off side. The second thing which we require is definitely in our own country and we need a Budget which is supportive for growth. We need parliament which is actually enacting legislations related to land reforms, labour reforms, goods and services tax (GST), bankruptcy code. We need monsoon which for last two years has been below average but hopefully this year should be normal. Finally we require corporate earnings recovery aided by lower interest rates and higher liquidity and ease of doing business. I think if you put these five ingredients together, there is no reason why our market will not continue to march like it has been marching upwards for last 30 years.
Three things which I believe will be surprising market on the positive side. One is the monsoon. Number one, we never had a hat-trick of failed monsoon. La Niña which is occurring right now in Pacific Ocean should be supportive of a good monsoon. So, there is a reasonable good chance that this year’s monsoon will be better than previous two years. Second, we believe there is fair amount of work going on bankruptcy code and in this Budget session there is a reasonably good chance for bankruptcy code to get cleared. Market is pricing in that there will be no work done in the parliament. If some of this law gets passed, there is a positive surprise over there. The third thing is related to earnings recovery in corporate India. Clearly today earnings are getting depressed because banks are clearing the backlogs of NPAs but those NPAs are not accumulated in this quarter. They have been accumulated over many quarters and the cleaning up process is beginning which means the future profitability growth will be far higher than what the current numbers are suggesting. So, when people are talking about aggregate earnings, they need to discount the fact that the NPA provisioning by PSU banks is resulting into suppressed profitability. Hopefully with adequate liquidity and interest rate cut and ease of doing business, we could see gradual recovery in the corporate earnings as well. So, these are the triggers which could be positive. The big thing is obviously the Budget from a sentiment point of view. Today valuations have become at the lower end of fair value but the sentiment is badly impacted partly because of what has happened in month of January and February and partly because what is happening in the global market. So, we need a sentiment trigger boost which the Budget should provide.