There has been a significant resistance towards investing in equities as an asset class over the recent months, mainly considering the confluence of all the negative factors in play - economic environment remaining challenging, lack of measures to start the economy, pressure on twin deficits, currency woes, concerns on sovereign downgrade and the US Federal Reserve tapering. The markets have been reacting at different instances to different reasons, the latest being the weakness in the currency. This has made them volatile and investors jittery. In fact, equities have generated no returns over five years, still struggling to get past the highs seen in January 2008. However, here is where we think an opportunity lies - we believe equity could possibly turn out to be one of the best performing asset class from a three year's perspective. As they say, 'opportunity lies in adversity'. In the past, the BSE Sensex has been moving in the narrow range of 18,000-20,000, displaying resilience on the downside, digesting all the negative news flow coming. We have reasons to believe the markets might positively surprise from here onwards.
Equity markets are lead indicators and will react to expectations rather than the actual. We believe the so-called challenges are already reflected in the current valuations. We have seen the markets generally bottoming at a private equity (PE) multiple of 11-13 times and we went quite close to that last month. Even in terms of India's market capitalisation to GDP, we are trading close to the lows at around 0.5 times, where there is limited downside. Hence, the bottom line is that the valuations are supportive, while the scope of PE multiple expansion exists, as earnings and visibility pick up.
Coming to the economy, we believe it is important to look beyond the current hazy environment. It is important not to miss the forest for the trees. The economic slowdown has been a victim of lack of investments, particularly from the private sector. However, we see the pieces of the puzzle gradually falling in place. India's exports have started picking up and an improvement in the global economy, coupled with the recent weakness in currency auger well for the country's trade. We believe that this coupled with lower imports, especially gold with the recent curbs, should help manage the current account deficit. On the fiscal front, we think the government is working in the right direction on fuel subsidy by gradually increasing the regulated rates. The monetary environment is expected to turn benign, with inflation expected to remain steady, which is likely to help RBI to reverse the recently announced tightening measures. In terms of growth, the two legs of agriculture and services seem to be functioning well. Industry, the third leg, is what needs to start running. A decent monsoon in the current season should aid in good agricultural production, which would support healthy rural demand.
We believe the government will continue to have a key role to play in providing direction to the economy and improving the overall sentiment. We have already started to see some action from the government - land acquisition, mining and FDI in some sectors. However, much more concrete steps are anticipated. Besides, the bigger global economies - US, China and Europe - seem to be turning the corners with a consistent flow of improving economic data which would be positive for global equities.
Concerns would remain on elections next year and which party would form the government. According to us, the markets are agnostic to a specific party, provided it comes with a reasonable majority. Also, the concerns on Fed tapering, seem overplayed; there could be some knee-jerk reactions to individual announcements. Moreover, this seems to have become kind of a known event, which the market would have already priced in.
We observe the markets have displayed a cyclical trend - Indian markets seem to be following an eight-year cycle (tops in 1992, 2000 and 2008); no returns for next five years after the top and the remaining three years give maximum returns. If this were to repeat, we could be getting into some exciting times for equities over the next couple of years. Thus, it is possible that in a quarter or two from now, we may have a different outlook on equities than what we are witnessing today.
The author is director, head of equities, wealth & investment, India, Barclays. Views are personal
Equity markets are lead indicators and will react to expectations rather than the actual. We believe the so-called challenges are already reflected in the current valuations. We have seen the markets generally bottoming at a private equity (PE) multiple of 11-13 times and we went quite close to that last month. Even in terms of India's market capitalisation to GDP, we are trading close to the lows at around 0.5 times, where there is limited downside. Hence, the bottom line is that the valuations are supportive, while the scope of PE multiple expansion exists, as earnings and visibility pick up.
Coming to the economy, we believe it is important to look beyond the current hazy environment. It is important not to miss the forest for the trees. The economic slowdown has been a victim of lack of investments, particularly from the private sector. However, we see the pieces of the puzzle gradually falling in place. India's exports have started picking up and an improvement in the global economy, coupled with the recent weakness in currency auger well for the country's trade. We believe that this coupled with lower imports, especially gold with the recent curbs, should help manage the current account deficit. On the fiscal front, we think the government is working in the right direction on fuel subsidy by gradually increasing the regulated rates. The monetary environment is expected to turn benign, with inflation expected to remain steady, which is likely to help RBI to reverse the recently announced tightening measures. In terms of growth, the two legs of agriculture and services seem to be functioning well. Industry, the third leg, is what needs to start running. A decent monsoon in the current season should aid in good agricultural production, which would support healthy rural demand.
We believe the government will continue to have a key role to play in providing direction to the economy and improving the overall sentiment. We have already started to see some action from the government - land acquisition, mining and FDI in some sectors. However, much more concrete steps are anticipated. Besides, the bigger global economies - US, China and Europe - seem to be turning the corners with a consistent flow of improving economic data which would be positive for global equities.
Concerns would remain on elections next year and which party would form the government. According to us, the markets are agnostic to a specific party, provided it comes with a reasonable majority. Also, the concerns on Fed tapering, seem overplayed; there could be some knee-jerk reactions to individual announcements. Moreover, this seems to have become kind of a known event, which the market would have already priced in.
We observe the markets have displayed a cyclical trend - Indian markets seem to be following an eight-year cycle (tops in 1992, 2000 and 2008); no returns for next five years after the top and the remaining three years give maximum returns. If this were to repeat, we could be getting into some exciting times for equities over the next couple of years. Thus, it is possible that in a quarter or two from now, we may have a different outlook on equities than what we are witnessing today.
The author is director, head of equities, wealth & investment, India, Barclays. Views are personal