When we look at the current financial news and developments in the domestic and global economy, we come across a lot of negative facts and figures that scare us from investing in equity market. In the global market, we hear about a deep slowdown in the world economy with a possibility of recession in the coming years. As a result, the bond yields are falling to new lows (example, US 10year yield is at a new 52 week low of 2.1% from a high of 3.25%). The new devil, “trade-war”, is catching the attention of investors and giving out the fear of ruining the benefits of globalization, which is the key basis of today’s developed world economy. In the last one year, the equity performance of important countries like China, South Africa, Mexico, South Korea and Europe were bad with an average negative return of -10%. While the US market has been flattish with volatility due to trade tensions and slowdown in economy.
At the same time, in the domestic economy, we see rural distress, weakest GDP growth in the last five years at 5.8% for Q4FY19, the 2nd driest pre-monsoon spell in the last 65 years (IMD data during March, April and May), lack of liquidity in banking system, low earnings growth and the most expensive valuation in the last 10 years with trading P/E of 26x on main benchmark like Nifty50.
In spite of this cloudy reality, the equity performance of India has been positive with a return of 13% in the last one year and 11% on YTD. The other two countries doing well are Brazil and Russia due to the uptick in crude and soft commodities prices. Gold being a haven asset, which is assumed to provide fair safety during such troubled times has given a muted positive return of 1.5% YoY and 6.5% 6M, in the international market.
Overall, the world’s wealth has consolidated during the year. The investment patterns got choosier by turning cautious and investing in risk-averse assets. The investment hierarchy was towards debt/bonds, stable currencies, oil and gold. A similar pattern is visible in India where S&P BSE Bond Index is giving a return of 12.5%, Gold with 4.5%, and INR appreciating by 7% from 52wk low about 6 months back.
While in the case of equity, the approach has been country specific with focus on stable sectors and stocks with top to bottom approach. In India, the best three performers with average +20% YoY are IT, finance and consumer durables while worst performing sectors are auto, metals and telecom while mid and small caps are down by 10 to 15%.
Though the undercurrent of the economy has been fragile, the market always had a hope that the economy will benefit from the previous reforms while new reforms will be initiated to accelerate growth and increase private investment. Hence the market was always on premium valuation. The world views India as an upcoming economy led by internal growth, isolating itself from the ongoing trade tension with possibility to gain from this issue. Given the limited headroom in valuation, we do not anticipate big growth in main indices. But at the same time, we have a positive view on the mid and small caps led by higher investments from FIIs and MFs in the coming periods. The short-term headwind for the domestic market is the high expectation from the full budget post the interim budget published in February-2019. The government will have to follow the fiscal prudence given the shortfall in financial revenue. It will be a challenge to match this expectation but government may have to stretch the fiscal target in the short-term, which is the need of the hour.
Posted: June 06, 2019.