Regardless of the competence of the next government, it would make sense to invest in dips from now.
Five years ago, India was undergoing the last general election. There was blind panic in May 2004 when it became apparent that the NDA was out. The Left prevented any substantive reform between 2004-09. Nevertheless, despite its passivity, the UPA presided over five years of sustained growth.
The NDA also ruled for five rather passive years.
The last substantive reforms were undertaken by the caretaker outfit of March-September 1999. That passed a raft load of ordinances and drafted key policies like the New Telecom Policy and the Electricity Policy that became the Electricity Act 2003. To its credit, the NDA allowed at least two dedicated, incorruptible ministers like B.C. Khanduri and Arun Shourie to implement some of the infrastructure-building and privatisation efforts.
The NDA generated far lower growth rates between 1999-2004 than its successor did between 2004-2009. This wasn’t the NDA’s fault. The dotcom bust sparked a global recession that became worse with the post-911 collapse. The world and India only pulled out of recession in 2003-04.
One may argue the UPA was plain lucky. The global economy was in a sweet spot for much of its tenure and India was a beneficiary. The government that will take charge within the next month or so may not be as lucky.
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The next year or two will see the global economy struggling to stay afloat and India will not do very well in that environment. There is little hope of unforced political reform from any of the key alliances. Realistically, all one can hope for is the next government will be reasonably sane and stable. Either NDA or UPA could deliver on that minimum.
It may be interesting to compare the circumstances of October 1999 and of April-May 2004 and now. In 1999, everything looked rosy. The Kargil war was over, the new-fangled IT industry and that mysterious entity, the Internet were delivering unheard of returns. The telecom reforms promised to make communications far more affordable. The caretaker Vajpayee government had been active.
Indian markets collapsed in March 2000. The dotcom boom went bust by June 2000. The Nifty was trading at 1,450 when the NDA government took over in October 1999. It hit a peak of 1,800 in February 2000 and it bottomed in the 900s in October 2001. It was only in September 2003 that the Nifty valuations climbed past the levels at which Vajpayee had taken the oath. When the May 2004 election results appeared, the Nifty went straight back to 1,300-levels – even lower than it had been in 1999, when the NDA took charge.
The UPA’s regime coincided with far higher returns. Manmohan Singh took charge with the Nifty hovering at 1700. Five years later, after a massive bear market, it’s at 3,400. That’s roughly 15 per cent CAGR. Those who got out at the peak of 6,200 in January 2008 made far more.
What sort of returns will the next regime deliver through 2009-2014? This is more likely to be a matter of luck rather than of competence. The chances of positive long-term returns is actually reasonable. The 15th Lok Sabha will convene during a bear-market when valuations are down 50 per cent from historic peaks.
There are few expectations riding on the next government. On the other hand, the global situation is bad and could get worse. That could imply another year of pain and further price corrections.
Valuations are also a little high for comfort. The Nifty has always been a killer investment at PE below 13, Price-Book value below 2.5 and dividend yield above 2 per cent. In 1999, the valuations were PE 23, PBV 4 and Dividend yield 1 per cent. In 2004, the market was at 14 PE, 3 PBV and dividend of 2.4 per cent.
At the current valuations of 16.5 PE, 2.9 PBV and dividend of 1.6 per cent, the returns are likely to be moderate rather than fabulous. But the odds do seem in favour of investing, particularly on dips, regardless of the competence of the next government.
This is what may be called a minimalist expectation. If the global situation does improve quicker than anticipated, returns could improve. If there’s continuity with the UPA returning to power, returns could improve beyond the minimal.