Stock market fluctuations: India’s structural story is just beginning to play out; we are still at inflection point

I am writing this article at a time when the markets are hitting an all-time high every few days. Veterans warn us that in times of excessive optimism one should take a more cautious and thoughtful view. However, for myriad reasons (enunciated below), I feel that the best for the markets is still to come and that India’s structural story is just beginning to play out. From a 5 to 7-year perspective, we are still at the inflection point. First, let’s look at the economic recovery from the numerous reforms that were undertaken in the last few years namely the Goods and Services Tax (GST), Real Estate Regulatory Act (RERA), Insolvency and Bankruptcy Code (IBC) among others. After the initial teething issues – which are characteristic of reforms – the worst is behind us and the economy is largely on the recovery trajectory. Investment cycle which is crucial to sustaining economic growth has also begun to pick up. Recently, the Reserve Bank of India (RBI) released data on the Capacity Utilization of domestic companies, which has risen to 75 percent in the March quarter – the highest in the last two years. This is a clear signal of an uptick in economic activity and will have a big impact on the profitability of the corporate sector. Demand-led growth will also encourage expansion plans, as is visible from the pick-up in bank credit. [caption id=“attachment_4416807” align=“alignleft” width=“380”]  Representative image. Reuters[/caption] One of the biggest strength of our economy (and something I am particularly enthused about) is our consumption power. As India transforms into a $5 trillion economy over the next eight years, our growth will be more inward-looking domestic demand and services-led (akin to the US in the 1980’s). India has a potent combination of right demographics and rising per capita incomes; this holds immense promise for consumption-related sectors, both staple and discretionary. As discretionary spends increase, low-cost financing options shall also continue to do well, backed by aspirational purchasing. This bodes well for FMCG, modern trade retailers, healthcare, NBFCs among others. The other encouraging trend is the structural and diversified rise in Indian exports. Numerous tailwinds like the depreciating rupee, intensification of trade wars between the US and China, revival in demand from the European Union and most importantly, rebalancing of Chinese economy - are reviving the Indian manufacturing led exports. Along with these catalysts, one must also be mindful of the risks that prevail in the macroeconomic milieu. The revival of the economy faces headwinds, primarily from a rising current account deficit (on the backdrop of a rising trade deficit) given the rising depreciation of the dollar and rising crude prices. Second, on the political front, this year, we shall witness four state elections and this is also the penultimate year to the run-up of the general elections. Hence, we could see some volatility. Lastly, the global tightening of liquidity in developed markets is putting pressure on emerging markets currencies, bonds and capital flows. However, the external risks are unequivocal for all emerging markets though India is relatively better placed than other markets but, is not isolated from global shocks. In summation, I feel India’s economy holds tremendous potential over the next decade especially given the three-pronged growth drivers of investments, consumption, exports and the best way to play these themes is to have a long-term horizon and to take advantage of the short-term volatility. This, however, is easier said than done. As is often observed in markets, it is the patience and the behavioral aspects that one needs to master to do well in equities and to use compounding to one’s advantage. Let me illustrate this with a simple example. Since, inception in 1979, the Sensex has given a 16 percent compounded return annually. To put this into perspective Rs 1,0000 invested in 1979 would be worth a whopping Rs 33 lakhs today. If you started a bit late and invested in 1991 you would still have Rs 20 lakhs; if you began in 2,000 it would be worth Rs 10 lakhs and if you were a really late bloomer, and began investing in 2008 you would still have Rs 4 lakhs! While this may seem impressive in hindsight, the key thing to note is that one would have had to be awfully patient and would have to sit tight, even in the face of recessions and temporary negativity. To do it successfully is simple, but it is not easy. In this context the words of the famous Peter Lynch serve as the pole star, “My best stock has been the third year, fourth year, the fifth year I have owned them. It’s not the third week, fourth week. People want their money very rapidly, It doesn’t happen.” (The author is President & CEO, Edelweiss Securities Ltd)