January was an interesting month for the markets
- INR 41,000 Cr of money pulled out from secondary market by FPI
- A scary day for small caps on January 24, an intra day fall of 8% was the norm
- High octane moves in global bond yields
- India GST collection trends above 1.3 lakh Cr for the 4th month in a row
We might do well to accept that CY22 will see some or the other macroeconomic headwind make the news regularly. Every month we will have to grapple with some or the other central bank offering their view on inflation and when rate normalization could start. Some more fodder for arm chair market commentators to chew on while investors need to start making adjustments to their decision making process.
As I type this out, the Indian 10 year yield has spiked to 6.9% in a very short period of time post the Budget. The Budget was growth oriented and was driven off sane revenue assumptions though some felt these were a tad conservative too. We’ll need to wait for the RBI commentary on deficit monetization before coming to any conclusions. That said, the 10 year G-sec rate moving to 7% has clear implications for equity market valuations. Buying a 15% growth 15% ROCE business today may not have the same investing outcome going forward as it did three years ago.
Q3 results so far have had some interesting trends…
Inflation is biting into rural discretionary spends, every FMCG major indicates this though they have improved market share across the board
Urban discretionary spends have gone through the roof; shoes, ready made garments and premium automobiles are seeing strong growth
Lenders appear to be turning the corner; better asset quality, higher NIM’s, decent credit growth across the large, well run banks
Pharma continues to see headwinds on the back of pricing pressure in US market while those focused on the domestic and other markets are better placed
Chemicals have seen another quarter of margin normalization though growth visibility is strong and capex plans are on track
IT Services has seen 25%+ YoY revenue growth but at lower margins Building materials appear to be on track for good growth over the medium term
There has been a healthy correction in the new age businesses that have listed recently. Almost every sensible investor I know thinks that valuations are still rich in this pocket. Buying into price strength of businesses that have below average unit economics works only for those who can cut positions quickly once the trend reverses. Short term noise should not trump medium term objectives.
For buy and hold medium term investors, buying into price weakness of good businesses that can deliver healthy growth over the medium term continues to be a reliable strategy. Price action might impact the narrative but it rarely affects business prospects over the medium term (exception being lenders).
Staying the course and sticking to what has worked in the past across market cycles might do the trick this time around too. Investing for the medium term during periods of sustained FPI selling in India has been profitable since 2013, even if it doesn’t pay off immediately.