Finding Returns

For the past five to six years, investors have been searching for an asset class with better returns. Surely, one can say that they must have found one now with equities presenting a promising picture.

 

We are bullish on the Indian equity markets considering the following outlook, where pros clearly overweigh compare to cons.

 

 

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Pros

Indian economy and government

 

  • The new Indian government is looking more proactive so far in terms of making mid-to-long term policies by commencing work on the same to achieve the set objectives within logical timelines

 

  • The government is focusing on most of the sectors with more focus on the infrastructure and manufacturing sectors. It is making serious attempts to create a healthy environment to attract more investments and improve the business environment in India

 

  • Further, the government is moving towards getting rid of subsidies, which would allow it to reduce deficit. This would have a positive impact on the ‘India Investment Ratings’ in the next few years

 

India GDP

 

  • On overall consensus on India’s GDP estimates is around 5.5% to 5.7% for FY15, while GDP for FY16 is estimated in the range of 6.2% to 6.8%

 

  • A year back not many people were optimistic about growth above 5% but recent quarterly numbers have proved that economy is coming back in shape with GDP growing at 5.7%

 

Inflation and interest

 

  • Inflation is until now controlled with more steps from the RBI on the liquidity front. However, we feel that the government needed to put in more effort to match up with product demand – supply equations, mainly on the agriculture sector front. The current government looks promising to work on the same in the long term. The inflation numbers are descent enough as of now to continue with the neutral policy on interest rate front

 

  • Interest rates are not likely to move up in the near future, considering the slowdown in inflation growth. In fact, we may see reversal of rates in the coming years

 

Monsoon

 

  • India Monsoon – Overall deficiency is about 10%, which is encouraging after initial expectations of bigger deficit.

 

GDP

Inflation

Monsoon

Valuations

Growth

Deficit

Trail P/E

Forward P/E

FY15

5.5 – 5.7%

7.9%*

10%

21

16

FY16

6.2-6.8%

17 – 18

 

Global

 

  • Overall consensus on change in interest rate by Fed is unlikely until next year, which would help the markets sustain the ongoing momentum

 

  • The US Jobs data have reflected strong numbers, with some of the US states even moving towards the ‘fully employed status’

 

  • Overall global consumption scenario is satisfactory until now and it is moving upwards in most of the countries

 

Oil

 

  • Oil prices have moved towards multi-year a low, which is great news for India, a country with heavy oil imports and high outflow of foreign exchange. This would strengthen Rupee valuation

 

Valuations

  • With NSE Nifty trail P/E quoting at around 21 times, it still might not be considered too overvalued with expectations of higher growth numbers in the coming quarters, as indicated by green shoots in the economy

 

  • Forward P/E is around 16 times, which could also be considered as safe levels to enter or remain invested into equities.

Cons

Indian economy and government

 

  • Although the government is going strong in terms of policy making, planning and implementation are the keys to overall success

 

  • With state elections round the corner, the government might not be able to take a few tough decisions on issues such as subsidies

 

Inflation and interest

 

  • Reversal of some of the factors such as oil prices or other agriculture prices might spike inflation, resulting in pressure on the RBI to change its stance on rates

 

Global

 

  • The US equity market valuations are on the higher side along with some of the global markets

 

  • The US Fed might start with the tapering of its quantitative easing in the next three to six months, which might reduce liquidity in the global markets

 

  • War like situation in some parts of the world such as Russia, Ukraine, Israel, Pakistan, and Iraq

 

  • Some of the countries are still not recovering enough from the slowdown effects. We have seen that countries such as Brazil, Turkey, and Russia registered considerable slowdown in the recent quarters

 

 

Although there are few concerns relating to some of the countries mentioned above, the probability of the above concerns impacting the Indian markets looks unlikely. Overall, the Indian economy is expected to perform well, considering the positive momentum in the economy, with a few other economies suffering from GDP slowdown. India still remained immune to slowdown of outside world well supported by internal consumption and ongoing improvement in governance.

 

We believe for investors, it won’t be difficult to find above average returns in the coming two to three years from Indian equities.

 

 

 

Happy investing…

 

Manish Tawde

Product Research & Financial Planning Desk

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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