DESPITE pricy valuations of Indian market at around 20 times FY17 earnings, most of the analysts I have talked to are not too worried and feel that the market will continue to receive steady flow of funds due to post-monsoon impact, on-demand scenario coupled with Seventh Pay Commission largesse and steadily improving rural incomes, all time high forex reserves, continued emphasis on reforms with GST already on road to implementation, continuation of softer monetary policy of RBI in view of softening inflation in the growth inflation dynamics, and expectations of stability and improvement in corporate earnings as a result of steady growth in GDP. The global liquidity is not likely to dry up any time soon due to the fact that European Central Bank and Bank of Japan may not change their stance of loose monetary policy substantially in view of their inflation targets still being a long way away.
However, the fact is that the growth’s impact on ground level is yet to be felt with industrial growth for April-August 2016 at -0.27% being the lowest in the last 10 years. The IIP data indicates deepening gloom in the industrial sector. If a comprehensive analysis of net profit of corporate India for June Quarter is any indication, any earning downgrades may be rude shock to investors. Growth rates are slowing down in most sectors with growth predominantly coming from margin expansion (not operating leverage but commodity price driven) rather than revenue growth —something that is not sustainable. If business cycle doesn’t pick up (lead by either capex or credit cycle), the earnings’ growth is unlikely to pick up.
Another worrying trend is defaults on loans against property reaching its highest level in 2016 at 5%, compared to around 2% for last 5 years. This may impact credit across retail, property and corporate segments or, at best, could make lenders more risk averse. The fiscal deficit target of 3.5% also looks to be difficult to achieve as the proceeds from telecom auction and PSU divestments may not meet budget targets. Increased consumption expenditure and implementation of GST and the 7th Pay Commission may further make it difficult to achieve. Strengthening dollar, possibility of a Fed rate hike in December, Us elections in November and worrying data from China may see heightened volatility in the market. The FPI flow may be slower than witnessed in the last couple of years, though domestic flows will continue to surprise on the upside in view of increased participation from EPFO, NPS and insurance companies. This will work as an effective cushion against any volatility arising due to global factors.
Retail investors should allocate more and more funds to equities since real estate and gold may give disappointing returns. However, since current valuations appear to have discounted most of the positives of Indian economy, investors investing at this stage should invest with a time horizon of 3-5 years. Consumer goods, consumer discretionaries, BFSI and infrastructure are the sectors worth looking at.
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