India Economy

Signalling good times ahead

Mahesh Patil | Updated on January 15, 2018



Ongoing economic reform and State poll outcomes underline long-term growth story

The markets have touched an all-time high. The path for this was set in the past three months due to a sequence of events.

First was the abeyance of the CBDT circular that soothed the nerves of the Foreign Institutional Investors (FII), followed by a prudent Budget presented by the government.

As the effect of demonetisation was lower than expected, India joined the global reflation trade. Further, the comments of Donald Trump on the strength of the dollar eased the rally on the currency that favoured risk-on into Emerging Markets. The latest one was the increased political stability for the next few years, post the recent State assembly elections.

The thumping victory of the ruling party at the Centre, in arguably the most important State (election-wise), paves the way for the political combine to continue in power well into the next tenure.

Considering the reform process the country has been set on in the last couple of years, the continuity of the regime at the helm of affairs is important to see the implementation of announced reforms.

GST on track

The largest indirect reform — the Goods and Services Tax (GST) — is on track for implementation on July 1.

The Bills were drafted by the GST Council during its recent meetings, ironing out some of the differences between the members.

There have been some concerns over inventory in transition not getting input credit and oversight on profiteering. These have been allayed by the government.

Over the next few years, companies become more efficient in their operations as “One Nation” becomes “One Market”. Tax collections would also improve due to the self-policing nature of the reform. There is opportunity for the organised players to gain market share from the unorganised ones.

The earnings of corporates have contracted over the last two years (considering Nifty50 companies). FY17 also could close with a tepid 2-3 per cent growth.

However, we believe that many of these would reverse in FY18 to clock double-digit growth.

On the valuation front, the trailing P/E ratio is 15 per cent higher than the 10-year average.

As the tepid nature of earnings over the last three years makes way for double-digit growth, the P/E ratio will start looking reasonable. On the P/B ratio and dividend yield basis, the current levels are trading at a discount to 10-year average. So, valuations are still in a reasonable zone.

Liquidity support

On the liquidity front, the domestic liquidity has been the bedrock for the strength of equity markets. The SIP book of mutual funds is over ₹50,000 crore on an annual basis. Pension funds are also investing over ₹10,000 crore.

Hence, even when FPIs sold over $4.6 billion in Q4-CY16, the domestic institutions provided support for the market. Further, FPIs have turned net buyers of over $4 billion in the last two months. This adds to the liquidity support provided by the DIIs.

On the global front, most strategists are turning bullish on emerging markets (changing their underweight stance as of year-end). The Fed has increased interest rate for the third time in this cycle. It would be measured in its approach to raise rates further so as not to hamper US economic growth.

The global markets are bringing down expectations of the pace at which Trumponomics would work. This halted the rally in the Dollar index and jump-up in US bond yields. This is good for emerging market flows.

Things are increasingly becoming positive on the economic, political and currency front. However, there could be short-term intermittent corrections due to global factors, general fatigue of markets, etc, which is good as it provides opportunity for markets to consolidate.

For first-time investors, it is always a good time to start investing to benefit from the structural long-term growth story of India.

For those who are already invested, maintaining a well-balanced portfolio is a good option.

The writer is Co-Chief Investment Officer, Birla Sun Life Asset Management Company

Published on March 26, 2017

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