The pace of action and volatility in the markets has picked up significantly. It doesn’t look like there will be a dearth of narratives for the next few weeks. Post the rate cut by the US Fed, FPI’s showed glimpses of coming back to India in a big way only for the party to get nipped in the bud by the action in China. Commentators then got busy with the “Sell India Buy China” narrative as if they understand global capital flows better than the asset allocators making the actual decisions. Just as the “carry trade” gyan tapered down in a few days, this one might too. On the other side of the world, Mr. Trump and Madame Kamala should keep things interesting till the US election results are clear by the first week of November.
All of this reminds us of 2016 when so much was happening in the world. The Brexit referendum, Demonetization and Mr. Trump’s surprise victory gave people a lot of stuff to talk about. A lot of talk, analysis and anxiety only for the hot issues to die down over time and for the market to become a slave of earnings again.
That brings us back to the basics – focus on corporate earnings, valuation of the individual stocks and go about building sensible, balanced portfolios. The world has always has something or the other going on. Unless one can express a tangible view on how growth & earnings can shape up for a particular business due to the macro changes, we have no business calling ourselves serious equity investors. In a few days the Q2 FY25 earnings season should get started; while we practice bottom up investing, we are always keen to observe and take notes on how the various segments of the Indian market are shaping up.
Will numbers start supporting the much anticipated consumption bounce in rural India? The RBI Governor recently mentioned in the FIBAC conference that private consumption (PFCE) has rebounded to 7.4% growth from 4% recently. With GFCF continuing to print a 7%+ number, his opinion is that more than 90% of India’s economy seen from the expenditure side is already growing at 7%+. Will this show up in the numbers for Q2 and justify the spike in stock prices seen since June?
Rebound of orders in the core sectors of the economy. April – May period predictably saw a slowdown in the pace of new order announcements due to the election. Given the political and policy continuity at the center, one should expect to see a clear increase in order announcements by Infra, capital goods and power sector players through H2 FY25. Will this play out as expected and cement medium term growth visibility for these segments?
Will the sputtering engine of IT Services finally start revving up? While defensive positioning of institutional investors since June has led to a spike in stock prices, will the businesses reciprocate this optimism? We still continue to have doubts over when things will get better here, there is still no tangible pickup in hiring across the board. The US Fed may have cut rates but very few entrepreneurs base operating decisions on interest rates, unless they are in the financials industry.
Will the much talked about housing starts reflect in better volumes for the building materials industry? There is a lot of expectation baked into stock prices here, with every decent business trading at 35+ TTM PE though volume growth is languishing in the lower to mid single digits. Can these valuations sustain if the commentary continues to be hopeful without the needed support from volumes?
Financials (barring a few exceptions) are likely to see average numbers through FY25. The era of benign credit costs appears to be behind us with the incremental gross NPA’s no longer being compensated by recoveries & upgrades. Corporate lending is nowhere close to taking off with corporate balance sheets being in the best shape they have been in for more than a decade now. With buoyant capital markets, a corporate has more options today than it did in the previous era. The next few quarters should answer whether the current Price to Book multiple for lenders turns out to be an anomaly or the new normal for a few years.
With almost 50% of the benchmark index (Financials + IT Services) not having immediate visibility of earnings growth, can the NIFTY 50 continue to have a smooth run till the numbers change? We’ve been pondering over this for a few months now. This is what prevents us from increasing exposure to the large cap segment, though there has been enough talk about how large caps should deliver relatively better returns from here. We just don’t see it in the numbers yet. Every business that appeals to us is either a mid cap or a smaller business even today, if we approach the task with an objective mindset. We’ve tried hard but still can’t find large, well discovered businesses that are reasonably priced given their growth prospects.
If one is investing for the medium term (3-5 years), is there any point in chasing relative strength over the short term?
Wouldn’t one be better off evaluating if the business can deliver earnings growth of > 15% p.a. over the next 3 years and if the current valuation multiple can be justified in this context – and drive the decision making off this?
The easier part of this bull market might be behind us but does that mean we deviate from our usual approach when growth prospects of the Indian economy continue to be healthy? At 7%+ real GDP growth, many emerging businesses should be able to deliver 2x of this growth for a few years
It is not easy making these decisions in the face of market and macro volatility, but who said investing was easy? We hope that investing continues to remain challenging so that investors get compensated enough for doing grunt work. The investing game will get tougher with time, the return we take for granted today might turn out to be a top decile quartile a decade from now.
India is on the verge of seeing something similar to the hedge fund boom seen in the US in the 1990’s, as HNI investors look for differentiated investing approaches and are willing to try things out. While the variety of options will definitely go up, the core principles of investing are unlikely to change drastically.
Picking up new skills, calibrating to the changing market texture while continuing to think independently from first principles should continue to keep us in the hunt.