The financial year is ending, and yes if you have invested in Equity – the performance must have delighted you. But as the old saying goes “what goes up, comes down too”, the equity markets with opportunities calls for caution too. So we thought to analyze what will drive the equity performance in coming years. Will equity management surprise this year? Or is it the “mother of bull runs” type of performance will continue? Who will drive it?
First, let me be upfront and tell that analyzing Equity Performance is not advertising Equity Investment or Culture. None of the investment should be made on the basis of past or predicted future performance only. The prime reason to take an equity exposure is your asset allocation and nothing else. So if equity suits you, go ahead otherwise first know what your asset allocation is.
So here is what we studied about equity in recent times. I will be using lot of simple pictures to break down, what we want to say. Pictures because, even if you do not like economics or hate complex jargons words, you can just see the trend. So just scroll down as lot of pictures coming right away. So this is how we feel equity performed and will perform in future.
To start with – Do you know few of the well-known shares have not moved since 2007? Yes, the big names like Reliance Industries or Airtel (Both dragged down by Jio) and many others. Some of these were reported by Business Standard:
But during this period some MFs NAVs skyrocketed. Some of these were:
Now, this is selective reporting of facts. You cannot choose the best assets randomly and avoid the bad ones. But you can use wisdom to make a best or second best decision. And one of the decision to decide -will you stay invested in equities in 2017-18? Will you make money in equities?
The answer is… Let’s try to understand some facts:
The markets have been on steroids. Here is the heatmap:
Here is how market roller coaster road during last 2 years:
So far so good, but is there steam left in the equity performance? Yes, we have to join some facts to get the actual picture. So, the entire equity market is the function of some factors which drive these indexes. These are:
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So I will not say much now and will show you how these Macro-Economic factors are posed against future.
India’s Growth Factors
So our first macroeconomic factor is India’s Growth and this is measured by many indicators like Industrial Production, employment and most talked about factor called GDP or Gross Domestic product.
GDP has come down a bit in last 2 months owing to slow business during Demonetization. But Government in its budget speech estimates it to be 7.5% this year. So huge gains. India is among the few countries with this kind of growth.
The next factor is Fiscal Deficit?
The factor determines the efficiency of the government. Are they creating more money than the expenditure so that surplus can be used to develop capital assets and public welfare? The good news is we are bang on target. This was a red flag by IMF and many countries have been bailed out due to rise in fiscal deficit. But we have a prudent government managing this.
Easing monetary policy, shrinking fiscal deficit and a more welcoming environment for FDIs will be key factors in ensuring the stability of macroeconomic factors.
The money is flowing in the capital markets both by Foreign Direct Investors and Domestic Investors.
While the capital markets will experience volatility with net FII outflows due to global factors, growing domestic inflows and attractive long-term valuations of Indian equity will bring in much-desired liquidity.
So, now let’s look at market figures, the ratios. These 5 parameters measure market’s expensiveness and cheapness:
- PE Ratio or Price Earning Ratio (The low the better)
- PB Ratio or Price to Book Value Ratio (Same, low the better)
- GDP Vs Market Capitalisation (Again, lower means scope still there for expansion of capitalization)
- EPS or Earning Per Share (Should increase, if less than history means corporates have still scope to make money and declare share earnings)
- Credit Growth (More is better and if low indicates scope of growth)
So here is look at these factors in comparison to 2007 before market crashed to almost half.
You can see, huge underutilization and scope for improvement.
People make money when a trend, the equity performance remains for a long time and investor hang on to their investments. In the US this is the 8th year when bull market is still running. But what about India, well next three years market indicators show a huge gap in earnings.
See the forward PE & EG (Earning Growth) estimate are going down indicating markets is still cheap and equity performance can continue for an extended period. Whereas Earning Per Share is increasing indicating the health returns.
We have seen enough numbers, but what about the political scenario? Is government doing enough to promote corporates? Well, the pace is slow but lot of things have been done or still in the pipeline.
Sectors like banking, infrastructure, real estate and NBFCs with others are expected to boost through key government reforms.
While economists are skeptical about the data, it has given the world the confidence in the Government’s ability to reform the country. In this scenario, we would only like to reiterate our view that despite the short-term pain imposed by this measure, the long-term impact on the economy would be positive.
We are of the view that regardless of the outcome of the recent state elections, the central government will manage to implement its most crucial reforms. The passage of the Goods and Services Tax (GST) Bill and surviving the demonetization drive implies that the government will continue to enjoy stable support of the country.
However, India is definitely not going to be insulated from the uncertainties that are going to be caused by rising oil prices, FED rate hikes, strengthening of economies like US and China, and FII outflows. All these uncertainties will make the market volatile in the short term and will likely stress investors and their portfolios.
The long term story stays intact, though, as we believe that the earnings of India Inc. will improve, which in turn, will see the economy growing at more than 7%.
Life moves on as usual for our investors and we continue to take exposure into the markets depending on the risk profile and investment goals.
“Stay calm while the markets go slant and the very same market will reward you for your patience”.
Hope you liked my research and this will boost your confidence while making or staying with equity investments. Share the article on social media using the tabs on this page.
Also, do narrate your views in the comments section below.