Our observation of your investing behaviour in the past month and a half tells us that the current market volatility has spooked you. Our advisors tell us that most of your fears fit into either of these:
- Markets are falling. I am going to wait more before I invest.
- Markets are falling. I don’t want to lose more by investing.
For the first response – I have a very simple question for you based on the data below:
Nifty fall from 52-week high on January 29, 2018 (as of March 19, 2018) -9.3% in less than 40 trading sessions
Number of occasions in which markets fell more than 9% in 45 days between 2015-2017 11 sessions out of 795 trading days or 1.4% of the times
Trailing Nifty P/E 3 months ago 26.8 times
Trailing Nifty P/E now 25 times
The above data tells you that in the last 3 years you had 2 in a 100 chance of such market corrections in such short periods for you to invest. Now if the above is not a decent correction in just 1.5 months, then what is? More so, because markets are not falling for poor internal data. This is not a distress sale! If anything, I am going to show you further below on how almost every metric that matters to markets are improving. Markets corrected for other reasons: global jitters over rate hike in US, global protectionism risks in trade and internal political moves that add pressure on ruling coalition but are far from destabilising. In all this noise, we cannot be oblivious to improving ground reality.
For the second response, this entire article is for you to understand why there are solid fundamental reasons for you to be investing instead of being spooked by your first-time experience with volatility.
We have already mentioned about the reasons for correction (summarised shortly above). Let us focus on what is happening with key data points:
When there is too much noise in the market, the best you can do is focus on earnings. And that is what you should be doing now. We had already written to you in late 2017 that earnings recovery is becoming evident.
The December 2017 quarter did not disappoint on this count. If you take the entire universe of listed companies (about 3,450 companies for which data was available) net profit grew just 4.4% for the quarter ended December 2017 over a year ago. But remove banks from this picture, then the profit growth is at a sound 17.5% over a year ago! Let’s take the Sensex 30 companies. The earnings growth for the above period was 9.7%. Simply remove SBI that had losses and the growth jumps to 17.5%! What does this say? Don’t get lost in averages. The earnings growth pick-up is partly a reason for valuations turning moderate. In other words, we are at a situation where earnings have improved (higher than the September and June quarters) and markets have also corrected.
Of course, we are not in any way leaving out the banking sector; as a broad revival is not possible without banks. The Insolvency and Bankruptcy Code (IBC) is pushing out a chunk of bad loans. Nearly half of the large corporate NPAs have now been referred to the National Company Law Tribunal (NCLT) through IBC. We expect this to reduce bad loans in the medium term. Better recovery of bad loans coupled with lower addition of new stressed assets (thanks to early identification mechanisms) will likely see slippages receding in the next fiscal.
Key data points turning around
Given below is a comprehensive chart that shows the turnaround in various data points up to December 2017. All these data points barring exports growth (which was at 9.5% in January 2018), continued to improve in 2018 as well.
Why are these data points important? The industrial activity is a sign of uptick in the economy. The auto sales reflect growing consumption in both rural and urban India. The credit uptick is an indicator that companies are borrowing more for activity and individuals are spending for purchases. Of course, that the GDP growth also touched 7.2% in the December quarter (with India regaining is status as the fastest growing nation) reflects all round improvement in the factors below.
But not all is rosy. Export growth may continue to struggle, despite global trade uptick. The after effect of GST and working capital crunches, besides trade protectionism in US can dent growth for longer periods. Other than this, credit offtake may again see some dip as the bank scams in the space may once again result in banks playing it cautiously.
Rural story gaining ground
Behind the strong 2 -wheeler and tractor sales data you see above lies a rural story of consumption which the stock market appears to have recognised in recent times. You will be surprised to know about the following data points:
- 99% of Rural India is said to have a bank account now.
- According to a Goldman Sachs report, 58% of rural consumption is skewed towards spending on food and beverages as opposed to 33% in urban regions. It is small wonder that consumer goods companies are now beginning to focus on products in rural India and are already seeing an uptick in volumes there.
- The above report also stated that mobile broadband users as a percentage of mobile users is 48.4% in Rural India against 11.7% in urban places.
- Above all the graphic below shows the importance that rural regions have received in Budget 2018 in the form of broad-based spending to improve agri and non-agri income.
This rural story stems from multiple channels. One, rural wage growth has generally kept pace with MSP increases. The sharp growth in MGNREGA may further leave higher non-farm income in the hands of Rural India. Data below will tell you why rural wage growth can be expected to improve.
According to reports, implementation of promises on the MSP front can leave 20-30% more income in the hands of farmers, subject to normal monsoons. Two, demonetisation and financial inclusion efforts are also slowly leading to a wealth unlock effort, the impact of which can be expected to be felt by way of rural life style upgradation. Third, government spending, especially in providing for electricity or better roads can also translate into higher sales of vehicles as well as consumer electricals.
Corporate India is betting on this rural resurgence to touch a large number of sectors’ fortunes – agri inputs, auto and auto components, building materials, banking, and financial services and importantly FMCG and consumer discretionary. This broad-based story is already reflected in improved earnings in some of these segments, specifically focusing on the rural story.
While inflation has been a growing concern in India and could play spoilsport at a time when growth is picking up, recent numbers point to easing, thanks to lower food prices. With global commodity price (other than oil) estimates pointing to moderation, the only continuing risk comes from crude, especially given the existing slippage on the deficit front. At this point, however, corporate revenue growth has been meaningfully above inflation and there appears no threat of inability to pass price hikes with stronger consumer demand.
Global protectionist trade policies, especially from the US has also been one of the key reasons that have disturbed markets in recent times. While the impact of this is yet to be seen, what is known is that India’s export growth has been sluggish for several years now and India has begun to look internally for growth. US accounts for about 15% of our exports. But the growth in exports to US has dwindled in recent years. Also, India does not figure among the top nations that account for US imports. China, Canada, Mexico, Germany, Japan and South Korea dominate it. Hence unlike European or Chinese economies, which are larger exporters to the US, India can be expected to be less hurt by the protectionism measures.
Also, global economists point to data on very strong global trade volume growth supported by GDP growth. And this can keep trade ticking globally.
Not to be outdone by external events, India decided to have its pet peeve with politics. Defeat of the BJP in two Lok Sabha bye-elections in UP and TDP’s no confidence motion against the NDA raises uncertainties over pre-poll alliances for the 2019 general elections. This could also mean that the government may come with policies/spending to attract vote bank in pockets, specifically rural India. But then, to us, it only signals a stronger tactical play for rural consumption.
Overall, while political risks cannot be brushed aside and the coming year will provide further clarity, the current structural reforms already done are unlikely to be easily undone by any government that comes in 2019. To this extent, it is important to look at continuity of long-term reforms than just the continuity of coalitions.
What are we telling you?
If one waited for all concerns to abate, then no time is good to invest!
Our message is simple. If you ignore the noise from political, economic and trade risks and look at the opportunity in Corporate India, 2018 could be a year for accumulating. Yes, the present volatility can be expected to continue. But this is the primary reason we ask you to invest through SIPs, and more importantly, keep them going.
Here’s an article by my colleague Bhavana on how SIPs effectively average cost for you if you hold in a down market! https://blog.fundsindia.com/blog/personal-finance/dont-stop-sips/13294
If you have deeper pockets and higher surplus, then in addition to SIPs, adding lumpsums in market falls is a good idea. We have been sounding you off on falls above 5% as they provide some correction to deploy further.
Please note that we were early in calling out ahead of the September quarter GDP numbers that the economy has bottomed out and concerns are overblown. We also later called out an earnings recovery based on the uptick in some of the segments in the September quarter earnings. Now, our call is that 2018 will provide opportunities to average.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.
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