Vijay Kumar Gaba

There is a virtual stagflation in the domestic economy, constraining private consumption. The exports have helped in the past couple of years to some extent. However, the higher probability of slowing growth in the western countries due to tightening monetary policies and the spectre of a prolonged geopolitical conflict in Europe and probable reorganization of the global order (political realignment, trade blocks, currency preferences, energy mix etc.) clouds the exports’ growth in FY23.

Another key driver of growth in the past few years has been public expenditure. The government made decent cash payments to the poor and farmers to support private consumption. It also accelerated the expenditure on capacity building, to compensate for the slower private investment. From the FY23BE it is clear that the government’s capacity to support the growth is now limited by fiscal constraints.

What does this mean for the equity markets?

In my view, the following ten themes have been the primary drivers of the performance of Indian equities in past five years:

1.    Larger well organized businesses gaining market share at the expense of smaller poorly organized businesses. Demonetization, GST and Covid-19 have aided this trend materially. This trend has been seen across sectors and geographies.

2.    Import substitution and make for exports. Many sectors like chemicals, pharmaceutical (API), electronics, food processing etc. have built decent capacities to produce locally, the goods that were largely imported. Some global corporations have increased their domestic capacity to address the export markets from India. Many Indian manufacturers have also built material capacity to address the export markets. The government has aided this trend by providing fiscal and monetary incentives.

3.    Implementation of Insolvency and Bankruptcy and some ancillary provisions, gave impetus to the resolution of bad assets and material improvement in the asset quality of the financial lenders.

4.    Persistently negative real rates, stagflationary environment, business stress for smaller proprietary businesses and significant losses in some debt portfolios, motivated a large section of household investors to invest in equities for augmenting their incomes and even protecting the savings.

5.    Increase in rural income due to cash payouts by the government, higher MSP for crops, better access to markets etc.

6.    Increasing popularity of digital technology, driving efficiency for traditional businesses and facilitating numerous new businesses (Etailers, FinTech, B2B & B2C platforms, incubators, etc.) that command significantly higher valuation than their traditional counterparts.

7.    Overcapacity in infrastructure like Roads & power, where traditionally India has remained deficient, resulting in higher productivity and better cost efficiencies for businesses.

8.    Aspirational spending of the Indian middle class outpacing the essential spending, resulting in higher discretionary spending.

9.    Climate change efforts prompting higher interest in clean energy and electric mobility.

10.  Cut in corporate tax rates leading to higher PAT for numerous companies.

To decide what to next, an investor will have to make assess how the current and evolving economic, financial and geopolitical situation will:

·         Impact these drivers of Indian equity markets?

·         Impact the earnings forecasts for FY23 and FY24, which basically hinge upon the operation of these drivers?

The assessment will also have to factor whether the impacts as assessed above, will have an endurable impact or it will be just a passing reflection.

In my view, it will just be a passing reflection and these drivers of the Indian equity market shall endure in the medium term (3 to4 years). Therefore, I would mostly be ignoring the near term turbulence and stay put. I would:

·         Follow a rather simple investment style to achieve my investment goals. It is highly likely that this path is boring, long and apparently less rewarding, but in my view this is the only way sustainable returns could be obtained over a longer period of time.

·         Avoid taking contrarian views.

·         Take a straight road, invest in businesses that are likely to do well (sustainable revenue growth and profitability), generate strong cash flows; have sustainable gearing; timely adapt to the emerging technology and market trends, and most important have consistently enhanced shareholder value. These businesses need not necessarily be in the “hot sectors” and these businesses may necessarily not be large enough to find place in benchmark indices.

Of course there is nothing proprietary about these thoughts. Many people have often repeated it. Nonetheless, I feel, like religious rituals and chants, these also need to be practiced and chanted regularly.