Presently, the collective wisdom in Indian stock market appears
divided at least on two issues over the consideration of appropriate equity
investment strategy.
The first point of division is over the sustainability of the
stock markets at the present levels.
A smaller but influential segment, which primarily includes
economists, development bankers and strategists, believes that the macro
conditions in Indian economy may not improve materially from the current level
at least till FY21. The political and fiscal constraints shall limit the
government's ability to stimulate the economy through fiscal incentives and
material increase in infrastructure investments. The private investment may not
see any significant improvement in the absence of large scale new employment
opportunities; occurrence of which looks improbable unless radical reforms in
labor and land laws are executed earnestly and immediately. Regardless of the
initiation of the resolution process for many large struggling businesses in
the core sectors (power, roads, cement, steel, mining etc), the financial
stress remains elevated and is percolating to other sectors and households.
Under these circumstances expecting any material improvement in corporate
earnings would be unreasonable. The recent performance of the Indian equities
which is mostly based on PER re-rating may not be sustainable and a correction
may set in 2020 itself.
The larger segment, comprising of asset managers, analysts, large
investors, and intermediaries, believes that the measures already initiated by
the government, e.g., GST, IBC, RERA, corporate tax rate restructuring, etc.
shall result in marked improvement in the macro as well as micro environment.
Initiatives to encourage foreign investment in manufacturing and the
government's thrust on building massive infrastructure shall generate large
number of employment and demand for private investment as well consumption.
Lower interest rates shall ease the financial stress; and resolution of
stressed cases shall bring many valuable idle assets back into the business.
This group is quite optimistic about the opportunity being provided by the
Sino-US trade conflict, assuming that India shall be able to attract many
western conglomerates that may be looking to relocate from China to other
friendly jurisdictions. The corporate earnings therefore should see a steady
rise from the present levels and may grow upwards of 20% in FY21.
The second and more intensely debated point of disagreement is
about the choice between the large cap stocks (quality) vs the mid cap (value
& growth) stocks. The debating parties here are mostly analysts and fund
managers. The market appears vertically divided on this issue. The number of
people arguing from both the sides is almost equal.
The group favoring stocks with expensive valuations but higher
visibility of earnings growth, sustainability, quality of balance sheet and
product and technology leadership argues that the present strength of these companies
shall automatically enable these companies to dominate the market in the future
helping these to attain higher and faster growth trajectory. The apparently
expensive current valuations are therefore totally justifiable and should not
be a matter of concern for the investors.
The other group however finds a bubble in the large cap
valuations, as most of these stocks have failed to deliver a growth
commensurate with their valuations in past many years. In their view, the
assumption of faster and higher growth trajectory therefore is mostly untenable
and needs to be rejected. This group sees tremendous value and growth
opportunities in the second tier companies which have delivered consistent
results in challenging environment.
I am watching this debate keenly. However, so far I have not
found any argument compelling enough to inspire a change in my investment
strategy.
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