There has been deterioration in Indian macros in last few months, to some extent driven by increasing oil prices, which demands derating of PE multiples. However, outlook on earnings growth seem to be improving. Most of frequent data points suggest that Indian economy has recovered from the disruptions caused by demonetization and implementation of GST. Improving demand scenario and stabilizing supply chains augur well for earnings. In next few quarters, we should expect normalization of credit costs in banking system which would be a meaningful contributor to market wide earnings growth. Hence, we believe, next few months, markets would be an interplay between deteriorating macros and improving micros. Election heavy calendar and increasing political noises in the run up to the general elections may be a source of volatility.
In terms of portfolio construction, we are positioning our portfolio with companies where there is visibility in earnings. In such volatile times, quality of balance sheet and quality of management can be a big differentiator. We have significant exposure to sectors like consumer and financials. We believe, companies in these sectors have huge opportunity for growth. India is a demographically young country with more than half of its population being below 25 years of age. As our economy and per capita incomes grow, consumption baskets will grow and for many categories growth can be exponential beyond certain inflection points. Premiumization and growth in number of consumers would be key drivers for this growth. No doubt, one can argue that valuations based on near term Price to Earnings ratios are expensive for consumer sector. However, considering the runway for growth, capital efficiency, management quality, some of the companies in the sector have the potential to create significant wealth for their investors over longer term.
As far as financial services sector is concerned, apart from the macro drivers, improving penetration and financialization of savings are some of the key trends that will support the growth. Apart from banks, investors have the option to play these trends through NBFCs, Life Insurance Companies, General Insurance Companies, broking and wealth management companies and asset management companies.
Within banks, we have positive stance on private sector banks as they are well capitalized, well invested in technology, earn healthy Return on Assets and have fast growing retail franchises. We believe, at current juncture, some of the large corporate lenders can also deliver healthy returns from medium term perspective.
Currently, Investors have anxieties around possible election outcomes and their impact on markets. I believe, there is enough historical evidence to suggest that election outcomes may have impact on markets in near term, however, eventually underlying fundamentals catch up.
Hence, investors would be well advised not to invest on the basis of election outcomes or expectations of certain election outcomes as over longer term, fundamentals of the underlying businesses in which you invest and the price you pay to buy them, would determine your returns.
In times like this, investors tend to question their judgment on investing in equities and tend to make the mistake of deviating from their asset allocation plans. No doubt, when stock prices go up devoid of fundamentals or stretch too far ahead of their fundamentals, they are bound to correct. Market wisdom says that stock prices never stop at their fair value when they are going up or when they are on their way down. Hence, it is always difficult to call out tops/bottoms and to time the market. Equity as an asset class is volatile in nature. To make the most from it, investors should avoid trying to time the market instead focus on investing from long term perspective and ride through the volatile phases.
The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.
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