Vijay Kumar Gaba

 The new year of the Goddess of Wealth (Mahalakshami) has started on a rather somber note for the Indian equities. After a very strong year since Diwali of 2020, the markets appear tired and uncertain.

The tailwinds of easy money and lower borrowing cost, which were among the factors that supported strong market performance since Diwali of 2020, appear weakening; whereas the headwinds of inflation, tighter money, and slowing growth appear gaining strength.

The valuation comfort that aided investors’ sentiments last year, is no longer available. The opportunity provided by the panic reaction to the Covid-19 pandemic has been mostly exploited by investors. Most of the low hanging fruits have already been plucked. The risk reward ratio is no longer favorable at the broader levels at least.

The Covid-19 pandemic itself, and the response to the pandemic created numerous opportunities in past one and a half year. The market readily identified these opportunities, and investors positioned themselves well in time to benefit from these opportunities in next few years. There is therefore little element of positive growth surprise in most of these opportunities; to the contrary the chances of negative surprises do exist. Some of the trends where investors are well entrenched could be listed as follows:

·         Acceleration in the process of consolidation of businesses, at the expense of smaller and unorganized enterprises that started a few years ago.

·         Enhanced role of technology in business and household management. The trend is most visible in digitalization of financial services, retail selling of products and services, entertainment & socializing, and education & skill enhancement, etc.

·         Rise in public expenditure to support employment and capacity building.

·         Enhanced policy support for private enterprise for capacity building to achieve the goals of sustainability, self-reliance, employment, higher growth etc.

·         Commodity inflation due to global imbalances in demand-supply equilibrium for many commodities. The inflation could have been resulted due to logistic constraints, underinvestment in capacity enhancement in past one decade, sudden and sharp rise in localized demand due to opening of economies post pandemic caused lockdowns; and speculative positioning aided by cheap and abundant money.

There is little margin for error in the market, as evident from the recent episodes of violent market reactions to marginally below expectation results and adverse policy decisions. Significantly increased jitteriness before most routine market and policy events like scheduled policy meets, declaration of quarterly results and monthly sales numbers etc., is also indicative of the dithering investors’ confidence in the markets.

Multiple downgrades of emerging market equities in general and Indian equities in particular; acceleration in the selling by foreign investors and sharp correction in some bloated pockets of the markets in past three weeks has further added to the nervousness of the investors.

Outlook for the new Diwali year

The market outlook for next 12 months is uncertain. For the next few months, the markets will be guided by the direction of global monetary policy and consequent direction of flows. The expected slowdown in growth due to elevated commodity inflation and exhaustion of policy stimulus may also adversely impact investors’ sentiments. However, there is nothing to indicate a substantial decline in the market or a protracted phase of uncertainty. The sentiments shall improve as the time progresses and investors adjust their return expectations and asset allocations.

It is important to note that the government has very well protected the fiscal position and managed to overcome the external vulnerabilities while managing the pandemic. The twin deficits, which have traditionally bothered the Indian equity markets during the periods of slower growth and global monetary tightening, may not be matter of material concern this time around. Indian equities may therefore not witness any material sell off as the global monetary tightening cycle kicks off.

Having fully recovered from the economic contraction caused by the pandemic, the Indian economy is now faced with the challenges to find new propellers for the economic growth. The policy initiatives to accelerate growth appear promising. Substantial public outlay for infrastructure capacity building and incentives for private investment in new capacities augurs well for a strong new growth cycle which may have already taken root and show accelerated growth in FY23.

Accordingly, my outlook for the Indian equities for next 12 months is as follows.

·         For next few months, the markets may remain volatile and weak. This volatility and weakness may provide good opportunities for restructuring the portfolios and positioning for new growth drivers. Overall, benchmark indices may yield single digit returns for the new Diwali year.

·         Investors might consider moderating their return expectations and altering their asset allocation accordingly. The equity returns of past 18months were exceptions and should be seen as such only. Benchmarking portfolios to these returns and taking avoidable risk is totally unadvisable.

·         Any precipitous rise in bond yields in next few months may be a decent opportunity to increase the debt allocation.

·         While technology remains a key driver of growth, buying anything at any price might not be the best strategy for investors.

·         Real estate appears to be one of the preferred spaces for now. However, sharp rise in domestic rates could suddenly change the sentiment for real estate. The investors need to therefore tread very cautiously in this sector. For smaller investors taking leveraged bets in illiquid asset is not advisable. It is important to note that unlike the previous real estate cycle, this time the investors have an opportunity to invest in good quality real estate through liquid, affordable and dematerialized instruments, viz., REITS.

Trivia

India is a fascinating amalgam of diverse cultures and traditions. Most ethnic communities here follow a lunar calendar. However, there are many which follow a lunar/solar calendar, Some communities also follow a solar year. Accordingly, there are numerous “New Year” days in our country.

The Government of India follows two calendars - Lunar calendar based on Saka Samvat and Solar based Georgian calendar. The new financial year and academic years (mostly) follow  April-March cycle based on Georgian calendar. Most Hindu communities follow a Lunar based calendar based on Vikarm Samvat. The New Year for these communities starts with the first day new moon in Chaitra Month (March/April). Only in Gujarat and Rajasthan, Balipratipada (first day of new moon in Kartik month) is celebrated as New Year.

The fact that the stock markets in India celebrate Balipratipada as New Year, signifies the important role Gujarati and Rajasthani communities have played in the development of financial markets in the country. To some it may also imply the overwhelming influence of these communities on the financial system of the country.

Nonetheless, it is important to note that Vikarm Samvat 2078 actually started om 13 April 2021 for most of India. For the Government of India, the new year (Saka Samvat 1943) started on 22 March 2021.

(One version of this article was published at moneycontrol.com on 4 November 2021)