Indian equities pendulum in August month swung on the bear side of the sentiment. Nifty declined by around 1.58% m-o-m while Sensex was down by 2.41%. However, the longer term market uptrend remains intact. Presently the market remains liquidity driven. For now, the hope of a bounce-back in corporate earning is trumping the logic of growth slowdown.
GDP slowdown of 5.7% for Q1-FY18 was a bit disappointing. Cumulative effect of demonetisation and GST rollout may be the key reasons for this moderation. But we are perhaps not adequately pinpointing the role of high interest rate in this deceleration. At 6%, the RBI repo rate may look as historical low levels. But with a CPI inflation at 2.36% the real interest rate levels are way high. Perhaps at highest level in decades.
There were multiple forewarnings indicating slowdown post demonetisation and GST rollout. In this backdrop, the central banker’s inflation centricity is understandable from long term point of view but it will have an impact on growth in the short term.
It is vital for growth that real interest rates remain in equilibrium. Occupationally, a large population of India is employed in agriculture, or are either self-employed, or are business people. That is: they are the producers. The salaried class, both in organised and unorganised sector is dependent on the wealth generation of these producers.
The high real interest rate is a disincentive for this producers’ class. The savers too are preferring to invest rather than consume given the high real rates. The high real interest rate has also led to the overvaluation in rupee and has impacted our overseas trade.
Growth must be seen as a mission of national importance for India for the next 10-12 years to uplift large population below poverty to higher level. The changing technological landscape if not embraced fully will have serious social, economic and security costs for India. Already China has a big head-start in Quantum Computing, Artificial Intelligence and Robotics. India requires a mission mode collaboration between Industry, Government and Academia so that we don’t miss the train. ‘Data’ is already a strategic resource. We must aggressively conserve it, preserve it and create a sophisticated hardware, software and ‘legalware’ base for it.
Coming back to our more immediate concern, the corporate earnings season for the last quarter remained bland. As per a broker’s report, the aggregate sales only grew by 9.8% yoy. While the PAT declined by 9.3%. The Nifty EPS growth forecasts have been cut and the EPS growth is now seen at around 14% for FY18E. Having said that, we continue to believe that India is structurally on a firm footing. Most of the growth factors are in place. Only the final piece which is the uptick in private investment expenditure – needs to take off.
For the markets, the short term volatility due to geo-political issues remains a possibility. Investors can utilise goal oriented asset allocation strategies to participate in the market while also mitigate risk. SIP remains the preferred tool for long term participation in equities market.
By Nilesh Shah: Managing Director – Kotak Mahindra Asset Management Company.