After the euphoric period for the market during 2015-2017, the markets have struggled to move up further as the corporate earnings have not witnessed the revival which was much expected. This is despite some recovery in the GDP growth during the last year. The current nifty valuations at 20X and 16x for FY19 and FY20 (factoring in earnings growth of 15% and 21%) are not cheap and hence, valuations led upside to markets looks difficult. Markets should deliver earnings led returns, which would be decent if the projected earnings are actually delivered.
There are a lot of challenges in between. Some of the macro indicators have been slowing down like auto sales, cement demand, airline traffic etc. Since consumption is slowing down, the recovery of private sector capex is a must to drive growth as the government balance sheet does not have adequate room to spend to boost growth. Hence, stable government at centre which can last for five years would be a critical factor to watch as we enter election period in the next six months. Global interest rates and flows, domestic liquidity would be other important factors for sustainability of growth.
While the challenges persist, there is an opportunity to make reasonable returns which meaningfully beat inflation through long term compounding by investing into equity markets as we are among the fastest growing economies in the world. But the earnings cycle is at its bottom and there is less room for the rates to go up. Investors should come to markets with an investment horizon of five years at least in order to participate in the compounding growth story.
At SBIMF, our focus is on identifying and investing in businesses and management who tend to consistently outperform in terms of growth with efficient capital allocation. We run different investment strategies to cater to varied needs of the investors and have an experienced team which focuses on generating long term alpha for the investors.
From the desk of Sohini Andani, Fund Manager, SBI Mutual Fund.