THE market may be looking overvalued from a historical perspective, but the liquidity driven rally has got another boost with the US Fed’s decision to defer the rate hike yet another time. Though no economic pickup is expected for a couple of quarters as yet, the market may continue to drive upwards due to other factors. The crackdown on black money will push liquidity into the white economy and boost consumption, and is also likely to drive investments away from gold and real estate to financial assets. The clearing of balance sheets of public sector banks and emergence of efficient private banks and NBFCs makes the financial system more robust. The thrust on road construction and infrastructure will boost demand for capital and other goods. For the last two years, corporate earnings have remained depressed but the same is likely to pick up in the next two years aided by good monsoon and rise in rural demand, easier interest rate regime and the impact of the 7th pay commission.
However, global markets remain worrying and with FIIs controlling more than 20 per cent of the market, their exit may cause ripples. The banking system of the developed world is vulnerable, especially post Brexit as the value of collaterals have come down with a decline in real estate prices. At the same time, net interest margins have been shrinking due to negative or near zero interest rates. The US presidential election may bring in further uncertainty and the warlike situation building up between India and Pakistan may make the market nervous.
Improving fundamentals such as declining inflation and current account deficit have bolstered the possibility of a rate cut. Also, the flow of more stable money such as retail investors’ contribution through SIPs, EPFO and pension funds coupled with diminishing supply of quality stocks may even witness a runaway bull market as soon as the sentiment and corporate earnings improve. Moreover, other investment options have been fast losing their attraction. The real return on bank deposits will be abysmally low due to taxability of the same. Real estate has its own set of problems with investors having burnt their fingers at the hands of reckless builders and parking of black money getting difficult. Gold has already been at levels that makes its risk reward equation adverse. Equities are, therefore, the best option and the latest data proves the same with the household savings in financial assets increasing to 10.8 per cent of GNDI (Gross National Disposable Income) in FY16 from 10 per cent in FY15 – most of it going for investment in shares. Investment in debentures still remains low at 0.7 per cent of GNDI. India remains the top pick for FPIs since it is hard to find a large economy that is growing at 7 per cent plus in the world economy that remains fragile.
Investors are advised to follow a stock specific approach as there still are stocks that have deep value and are available cheap despite the market looking grossly overvalued.
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