Creating a new normal…

The Indian markets have been scaling new highs with NIFTY remaining above 10,000 for over a month. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors ( as evident from a rating upgrade from Moody’s) in the India growth story which could well stay for another 7 years.

Domestic mutual funds continue to attract flows from investors with assets under management (AUM) of the industry increasing by Rs.51,148 cr in October to touch a new high of Rs.21.41 lakh cr. As per data from the Association of Mutual funds of India (AMFI), equity-oriented mutual funds (including arbitrage funds), balanced funds and equity linked savings scheme (ELSS) funds saw net inflows of Rs. 21,900 cr in October. In September, these funds saw inflows of Rs.27,077 cr. For the first seven months of the current financial year, cumulative inflows into these funds have tripled to Rs.1.51 lakh cr as compared to Rs.46,840 cr in the same period of the previous year.

Foreign institutional investors (FIIs) who took a break from buying Indian shares in August and September are returning after recent government announcements such as the Rs.2.11 lakh cr PSU bank recapitalization plan. Over October and November so far, FIIs have invested a net of $1.9 bn in Indian equities. US-based Moody’s on 17th November upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. This is expected to further boost FII investments into India. For the year to date, they are buyers to the tune of $7.4 bn.

September quarter results for most companies have already been declared & results have largely been in line with expectations. After its muted performance in the June quarter due to the transition to GST, India Inc is getting back on track going by the September quarter results. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will also be closely monitored. With real estate and gold giving subdued returns, investors have been looking at equities as an investment avenue. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.

The markets seem to be consolidating above the 10000 NIFTY mark. Corporate performance & economic data which comes in H2FY18 will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

NIFTY @ 10,000

The NIFTY raced to 10,000 in about 21 years, but the journey from 10,000 to 100,000 may not that long. The rally is expected to be supported by a strong macro environment, bounce back in earnings growth, pro-growth reforms, stable political environment, and domestic & global liquidity.
From its base value of 1,000 in November 1995, the NIFTY reached the 2000 mark in December 2004, taking 9.1 years to double. Thereafter, the journey was swift wherein it reached the 6000 mark in only 2.9 years. It took another 6.4 years to reach the 7000 mark in May 2014 from 6000 in December 2007. The 9000 level was achieved in March 2017 which was relatively faster from 7000 level taking only 2.8 years. NIFTY hit the 10,000 mark on July 25, 2017, taking only 4.3 months to move from 9,000 to 10,000.
The current rally in Indian market is fuelled by strong liquidity from both global as well as domestic investors. Reforms initiated by the Modi-led government reaffirm the faith of foreign investors in the India growth story which could well stay for another 7 years.
A recent IMF report on India GDP growth also added to investor confidence. India GDP growth rate forecast remained unchanged at 7.2% in 2017-18 and 7.7% in 2018-19 which will still be higher than China.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

Market valuations don’t matter in the long term

Equity markets are close to all-time highs and the question is whether markets are currently overvalued or not and if this is a good time to invest.
Markets in India tend to move in a 5 year cycle. Thus market valuations do play an important role in determining returns over the short term to medium term of 3-10 years. Thus investments made at lower valuations (lower P/E ratio, P/B ratio, Market cap/Sales) have yielded better returns if held for 3-10 years. Thus if you invest when the markets are down & trading at 10-15X trailing P/E band you can get 15-20% annualized returns over the next 3-10 years but if invested at above 20X trailing P/E band annualized returns tend to fall to single digits of 7-10%. These are market returns & certain mutual funds or stocks could perform better in the said time period.
For investments held for 15 years and above this tends to even out over multiple cycles & thus the impact of valuations on returns is minimal. Historically it has been seen that one can expect a 12-14% growth over such a period in line with real GDP growth in India. Incidentally GDP growth & Inflation in India always tends to add up to 12-14%. Mind you this is again just market/index returns & any investment in shares or mutual funds which beat market returns are expected to yield higher returns.
Trying to time the market for investing is a very difficult thing to do depending on the innumerable variables their movements tend to depend upon. The definition of over and undervaluation is subjective based on the valuation parameter used and can vary from time to time and from person to person (that is why you always have both a buyer & a seller at a price for a transaction to take place).
Thus instead of timing the market, investing for the long term through systematic investment plans (SIPs) is a better option. SIPs for longer tenures would ensure that investments are made across up and down market cycles thereby reducing the impact of market fluctuations. SIPs also inculcate discipline in savings & investing and avoids the endless debate on whether ‘this is the right time to invest’.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’