The last 18 months have been a difficult one for equity investors in
India. The trend has been downward. The economy is going through a transition.
There was also the credit crisis linked to Non-banking Finance Companies
(NBFC). A lot of this has caused a temporary liquidity crisis in the market.
The recent budget, too, has had some negative impact on foreign portfolio
investor’s taxation. This has led to a sell-off to an extent by foreign
portfolio investors which further weakened the equity market. How is this
likely to pan out and what does the market have in store for investors in the
big question.
Once the liquidity improves the equity market will recover. We believe the
government will make necessary announcements and initiate reforms in the coming
days to revive the economy. The recent decision to withdraw additional tax on
foreign portfolio investors is a welcome move.
While there is talk of a recession looming, we thing these fears are overblown.
In our opinion, these are short term downtrends often caused by inventory
cycles, excess consumer leverages, and low to no wage growth in the last 5
years.
This slowdown, in our view, is short lived. We expect the government to
take the necessary steps to arrest the lag in growth. India is going through
its own challenges on improving policy decisions, liquidity conditions etc.
Strong efforts are being made by the government, which keenly listens to the
concerns of investors.
As monetary policy remains loose (and may ease further), it is highly likely that government will step up spending to mitigate economic softness. As a result, there is a reasonable chance that markets will rise to higher valuations.
US -China trade talks will bear fruit. The trade war will ease, as Trump
gets into positive mode, keeping in mind the elections in USA next year. In a
year’s time, we believe the current challenges will tide over and there would
be more clarity on growth globally.
We believe the India demographics and digitalisation will continue to fuel
the growth of the economy in the next 5-10 years. And the government
continues its public capex. Staying invested in Indian equities offers the
potential to harness this growth.
In conclusion, the possible scenario we expect from here is that equity
market will perform in line with companies’ profit growth. It may be modest,
but definitely be positive over the next 5 years.