At Cafemutual Confluence 2018, Rahul Baijal, Fund Manager (Equity), Sundaram MF spoke about the macroeconomic concerns plaguing equity markets and the probable growth in Indian markets once they cool off.
In his presentation, he highlighted certain key concerns faced by the equity markets such as oil prices, rupee, foreign flows, political uncertainty, Fed rate hike, US- China trade tensions, IL&FS event and fiscal deficit. However, he urged the audience not to focus on the short-term picture. According to him, it is difficult to predict the market trajectory over the short-term. However, over a longer duration, India is in a structurally sound position.
Key macroeconomic concerns and their resolution
Three months after the conference, his words “when we meet again in the next six months things may be different”, seem to be ringing true. As predicted by him, many of the macro concerns mentioned by him have already diluted. Oil, which was hovering around 80 US$ levels fell to 50 US$ and rupee too stabilised around the low 70’s range. Meanwhile, the government and RBI together put in place measures to ensure that the IL&FS default does not spiral into a full-blown crisis. Fed too announced that it would slow down the pace of rate hike. Moreover, despite state elections not being in favour of the BJP, markets held on, reinforcing Rahul’s belief that markets like clarity.
Yet certain concerns persist, the general election in 2019 being an important one. Quoting data from a CLS report, which analysed the likely election outcome Rahul said, there is 62% probability of either BJP being in majority or a Modi led coalition. However, he cautioned that elections results were difficult to predict. Nevertheless, he believes that whatever the results be, markets will take it in its stride.
The US China standoff also continues. However, based on Trump’s previous negotiations with Canada and Mexico, Rahul is hopeful that a similar resolution could be possible between US and China too.
On a positive note, he believes that India’s long-term growth story continues to remain intact. India is amongst the fastest growing economies in both emerging markets and world over. Growth in other western economies has also improved. This coupled with recent price correction in both domestic and global equity markets have made valuations attractive. Furthermore, he feels that the domestic slowdown in real estate will lead to investor interest in equities.
Already, we saw foreign investors returning to equity markets in November, this trend could increase further if the remaining concerns get resolved too, feels Rahul.
Equity market potential
To put the equity market correction in perspective, Rahul talked about the valuation cycles. Rahul shared that equity markets are prone to valuation cycles. These cycles are driven by investor psychology. Typically, in bull markets, we see euphoria in terms of expectations and multiples. These are followed by a correction. 2018 was a year of correction after the build up in equity markets in the last few years, said Rahul.
Delving deeper, he tried to ascertain whether the correction has bottomed out. As per historical data, though we are near the bottom, it is difficult to ascertain for sure if markets will turn from here or we could see a further drop of 5-10%, according to him. Nonetheless, he shared that many stocks are available at attractive valuations even at the current levels. Rather than timing the markets in the short-term, he urged the audience to take the long-term view.
Talking about the long-term potential of India, he shared that ultimately, the equity market returns are linked to corporate earnings, which rely on economic growth. Over the next seven years, if India grows at about 7% (close to its current levels) and inflation remains around 4%, we could see the nominal growth of 11%. Nominal growth is real growth + inflation. Corporates, typically, grow at a faster pace than the GDP. Considering a 3% premium to GDP growth, we would get corporate earnings growth around 14%. As over long-term equity market returns are a product of corporate earnings, Indian equity markets have the potential to deliver returns around 14% in the next seven years provided the macroeconomic concerns abate and the growth assumptions fall in place, he said. Reiterating his belief in the growth potential of equity markets, he shared that historically equity markets have delivered 15% returns in the last 15 years, which is not too far from 14%.
He concluded the presentation with a humorous but hard-hitting quote, ‘Stock markets are the only markets where when things go on a discount, customers run out of the store’. Referring to the quote, he urged the audience to ignore the noise, stay invested and continue the SIPs.