November ushers in the cool winters at night and the joy of going out in the warm sun during the day. It is that time of the year when music programmes are held all over Mumbai and the different musical notes touch our souls in different ways. In such an environment, writing about stock markets appears to be a less satisfying activity for the soul, relatively speaking.
Having said that, the moods and rhythm of the market are wonderful to read, watch and predict. Presently, global macro news is not particularly conducive to feeling optimistic about the world and, therefore, about equities. While it is good to keep a track of macro news, it could be a distraction when it comes to investing.
In India, in recent months, slowing gross domestic product (GDP) growth and fear of being downgraded by credit agencies had kept investors nervous. However, with liquidity being pumped in by the US through QE3, and reform-oriented announcements by the Indian government in September, the market got a big boost. Following this, the market went into a period of lull when the Reserve Bank of India, not enthused by these reform attempts, refused to decrease interest rates. It said it would only act if it saw inflation tamed and fiscal deficit headed in the right direction.
Despite the current slowdown, we at Quantum still believe the rate of yearly GDP growth in future could be around 6.5 per cent. We were never believers in the sustainable nine per cent GDP growth for India that some people were predicting. In the past 30 years, the average rate of growth in India has been 6.2 per cent. This has been achieved in the face of challenges like inflation, high real interest rates, drought, floods, wars, assassinations and high oil prices. With a solid domestic savings rate of over 30 per cent, India has the capital to achieve a six per cent-plus rate of yearly growth in GDP.
Our focus at Quantum has always been on companies and managements that face these adversities and come out successful. Faced with a tough environment, there are scores of companies which have come up with innovative products, marketing strategies, improved efficiencies, lowered cost structure or improved balance sheet. The trick to build a good portfolio is to focus on such companies and their businesses.
Given our assumption of a sustainable yearly GDP growth of 6.5 per cent and inflation at similar levels, it is fair to expect the long-term revenue and earnings to grow at that pace. With a little more effort, there is a possibility of constructing portfolios with a slightly higher earnings growth. Broadly, returns over the long run should reflect this growth. However, with the recent increase in stock prices, the broad market is trading at a PE of 16, in line with its historical averages. Therefore, in the immediate future, the returns could be muted and market players might look for better evidence of growth in profits. If the government successfully pushes through some more reforms, the markets could trend up further. An immediate downside for the market could be the inability of the government to push through the reforms.
So, go ahead and make that risky decision to invest in equities. But, remember, there is no such thing as risk-free investing and equity returns are prone to volatility.
Disclaimer: The views expressed by the author are personal.
The author is director, Quantum Asset Management Company Private Limited