FY2021, you beauty!
Go back to March last year and recollect the investor mood, not many could have foreseen what the next 12 months would bring. Yet here we are, laughing all the way to the bank. Good investors never let a crisis go waste. This is in the very nature of the equity markets, holding good businesses through tumultuous periods has proven to be rewarding in the past and this time was no exception.
Every equity market crisis has investors scampering for the exit doors with the worry that this time is different, only to be proven wrong a few quarters later. In my experience, relying on time tested market wisdom and behavioral indicators has been far more lucrative for investors than listening to armchair economists at the peak of a crisis. Not that I got things perfectly right during the COVID crash, but I did ensure I did not make mistakes.
Make no mistake, we are interestingly poised in India.
My sense is that GST collections will be much higher than what any economist has projected. COVID has tipped most business segments towards organized players and this might show up as a healthy rise in GST collections over FY2022. If this happens, concerns over the fiscal deficit will abate and the ability of the Government to become growth focused will only increase.
Earnings momentum will is likely to be good if not great over the next quarter. Once the vaccine drive in India picks up momentum, the economy will see a consumption boost for a few quarters. FY2022 is likely to be good on the growth and the corporate earnings front. Further waves of COVID are unlikely to affect things too much since they don’t have the element of surprise any more. The ecosystem knows what to expect and how to react.
Look at the RBI FX reserves, we have more than doubled over the past five years and this trend will continue so long as the INR stays strong. India will generate a lot of goodwill with the international community since > 60% of the vaccines for the world are made in India. Geopolitically, India is on a very strong footing and this will eventually trickle down to economics too.
The risks to investors emerge from these fronts –
What has the equity market already priced in?
FII’s brought in INR 1.6 lakh+ Cr since November 2020, some of it will flow out at some point of time. If 15,000 Cr goes out in a month, equity indices can easily fall 5- 7% if not more
The tech frenzy in the US is a concern with crypto, NFT, SPAC penny stocks and what not. A sudden unwinding there can induce a bout of volatility
The domestic equity market continuing to be range bound around the current level will be a healthy outcome. This way some of the froth gets skimmed off and animal spirits stay within limits. At the top of each mini cycle, markets can become volatile while not doing too much over a 3-4 month time frame.
We will soon get into the Q4 earnings season, for the time being no major changes to the investing approach. Pruning once in a while to keep allocation in check and sitting on some dry powder to be deployed at an opportune time wouldn’t be a bad line to take.
Participate, but be prudent with your capital.