There is an unprecedented equity boom all over the world especially in the US. Earlier this week, global market cap crossed $100 trillion while the US government cut corporate tax rate to 20%. As a result, the fund flows to the emerging market could be impacted. Today, the US market is more attractive than any other country. Emerging markets will have to cut corporate rates to make it lower than the US. The time has come to lower the rates now. It’s a strange kind of situation in the US. Despite full employment, there is no sign of inflation. The way Dow is moving and the froth in the valuations, I think US markets could correct any time from the current levels.
We have tremendous political and economic stability. What we want now is a clear-cut strategy and effective implementation to make our $2-trillion economy into a $10-trillion economy. Out of our $2-trillion economy, our annual savings is around $600 billion of which only 4-5% is going into equities. Lots of savings is in fixed deposit, gold and real estate. So our equities have tremendous opportunities in the coming years.
Stocks are not cheap. India’s market capto-GDP ratio is about 95%, which was nearly 150% during the peak in 2007. This gives us a little comfort. Generally investors chase price and not value. In an expensive market like this, people should chase value and not price. The past two years have been fantastic for Indian equities but now it’s a challenging time. In the current scenario, the returns over the next two years would be much lower than what we got in the past two years as equity valuations are stretched. The only way one can make money from the current valuations is by buying quality and growth.
Correction is healthy for Indian stock market. There could be 300-500 points’ correction in Nifty in the short term. There are lots of people, who are sitting on the fence particularly from north India — where real estate is big. They will enter stock market if Nifty goes to 9,700-9,800 levels. These rich people from diamond and real estate industries are not at all exposed to equity markets till now. However, expectations of an earnings revival in second half of FY18 and FY19 will keep sentiment positive. Rising crude can act as a source of worry if prices were to rally further. India’s macros have remained healthy on balance. The key near-term trigger is the outcome of Gujarat state elections and victory of BJP will be cheered by the markets.
Earnings of India Inc have bottomed out. The recovery is around the corner. The government also has said that there won’t be any disruptive changes in policies. After three years of subdued rural consumption, there are now increasing signs of a pickup. Two successive years of normal monsoon, the combination of MSP hikes, direct benefit transfers and farm loan waivers should drive up disposable incomes. From here onwards, businesses will recover month after month. Global economy is doing extremely well so Indian economy should also pick up. Corporate commentary following the September quarter results from FMCG, autos, durables and retail reaffirms our view. Several FMCG companies have seen rural growth outpacing urban growth after many quarters. Auto companies like Hero Moto Corp, M&M and Escorts also highlighted rural growth recovery. India Inc expects the demand trends to strengthen as we move into second half of FY18. We are bullish on banking, housing finance, NBFCs, insurance companies, automobile, oil marketing and select pharma companies. In insurance sector, there are large opportunities. ICICI, HDFC and Max should do well in the long term.
Electric vehicles seem to be the largest disruptions of our time. But it doesn’t mean that Maruti, M&M or Tata Motors are finished. They could also bring the technology ahead of time because of their money power. They could also buyout small guys into this business. If there is a window of say 10 years for electric cars, you need at least 5-6 million cars per annum for next 10 years. And as a result, profitability of old companies should go up further, in my sense.
CAP (Competitive Advantage Period) refers to period of high profitability and GAP (Growth Advantage Period) refers to period of high earnings growth. Combination of CAP and GAP is exponential for company’s earnings growth, and hence for wealth creation. Our study shows that companies with favourable industry structure and clear strategy tend to enjoy extended high profitability (CAP). Further, companies with high growth mindset in high-growth industry situations are likely to enjoy extended high growth in profits (GAP). So, investors should look for companies where all these four factors fall in place.