Extraordinary Investing Year

It has been an extraordinary year so far. We have seen both, Sensex and Nifty, hitting new highs, which reverberates the power of long term equity investing. At the beginning of 2017, nobody could have guessed how the year would eventually turn out to be. The year 2017 was expected to reflect the effect of demonetization. GST implementation got delayed from April-2017 to July-2017 and there was no clarity on the GST rates for different industries. Following the note ban effect, budget was anticipated to be populist, which could have spoiled the trajectory of our fiscal discipline. Additionally, the Global temper too was for protectionist policies.

Come Diwali-2017, markets are trading near the all time high levels. Investor mood is upbeat despite the 5.7% GDP growth that economy reported in the June quarter. So what is the current market scenario and where is the market heading to?

Firstly, the interest rates continue to remain low and this is a big positive for the equity markets. Fixed deposits are currently yielding 6-6.5% returns, which is very low compared to the 8.5-9% rates earlier. This has been bringing heavy inflows in the equities, which is clearly reflected in the equity inflow statistics. For the last three years in row (FY2015-17), Indian investors had cumulatively put Rs2.15 lakh crore in the equity markets. This trend has continued in the current year too with Rs 61,000cr invested till the end of August-2017. Notably, markets have not disappointed us, and have appreciated by 22% in 2017. The Indian Rupee has also appreciated in the first half of the year and with RBI’s forex reserves at $400bn, Rupee is expected to be stable going ahead.

In July 2017, India’s largest indirect tax regime, GST was implemented. With such a huge reform, some teething issues were expected in the implementation stage. This is exactly what is happening right now. With the businesses adjusting to the new regime and due to de-stocking by the businesses in the initial period, first two quarters of the current fiscal were expected to be on the softer side. However, the second half of the fiscal is expected to be better than the first half.

Our economy is growing in pockets, indicating that consumption trend remains healthy and should remain so going ahead. Road construction is on rise and look at the automobile industry, scooters have been doing well, passengers car sales have been growing in double digits and lately commercial vehicles are also performing well. Smartphone sales are increasing and so is data consumption. Affordable housing supply and demand is rising, which is expected to bring hopes of revival in the real estate sector.

The rural economy, which was impacted in FY2015 and FY2016 due to poor monsoon, is on the recovery track since 2016. Monsoon had been good last year, and this year we have witnessed close to satisfactory monsoon. MSP hikes in FY2018 have been best in the last five years and our food grain production of 273.4 lakh MT in FY2017 is highest ever. All this combined is likely to boost farmer’s income, which should reshape the rural economy. This is reflected in the tractor sales, which is witnessing a strong rebound this year.

Coming back to the national economy, there is no denying that it has slowed down but it should be remembered that we have just digested a large scale reform i.e. GST. We believe that GST is a dose of medicine, which is would improve the health of our economy. We believe that reforms are not the quick fix solution but they are our solution in the long term to address structural issues.

The global economy is in a good shape and Indian demographics continue to remain attractive for the long term. This, together with the recovery in the rural economy, is expected to set the tone for the growth in the Indian economy going forward. We continue to maintain that Indian economy has a potential to grow by 8% for the long period.

In the nutshell, we maintain our stance that Indian markets are attractive, as interest rates continue to remain low for long period. We also do not see any immediate reason why interest rates in India should go up too fast in near term. In fact, RBI may cut the interest rates to spur the growth in the economy. In such a scenario, people should continue to invest in equities and mutual funds, which are the best ways to maximize wealth.

Disclaimer: The above opinion is that of Mr. Vaibhav Agrawal (Head of Research & ARQ -Angel One) & is for reference only.