After making a new all time high of 18600 in Oct 2021, Nifty benchmark indices have been quite volatile over the last six months or so. Volatility is presumed to be caused due to following factors
- Reversal of low interest rate cycle
- High Bond yields
- Russia invading Ukraine
- The rise in commodity prices
- High inflationary pressures, mostly due to disruption in the supply chain due to Covid 19 and attack on Ukraine
All these factors have definitely impacted the stock markets all over the world, but, in my understanding, the markets have latched on to these causes to correct themselves after one way steep rise post Covid. Nifty had risen from 7500 to 18600 in eighteen months, a 148% increase from the bottom it has made in Mar 2020.
This sharp volatility and roller coaster ride in the markets over the last few months are making investors nervous about the future outlook, especially when the world is facing so many uncertainties.
We as a country are much better placed economically as compared to the western world and other Asian countries. The following factors merit attention
- GDP Growth. From a 15 billion dollar economy at the time of independence in 1947, we have now become almost a 3 trillion dollar economy and expected to reach a 10 trillion dollar economy by 2030. To achieve this feat, we need to grow by 12.5% in nominal GDP terms (7-8% of real GDP growth and 4-5% of inflation) for the next ten years. Indian real GDP is expected to grow at the rate of 8.2% during the current financial year as announced by the IMF. India is the fastest growing economy in the world today. The gap between the US 10 years bond yields(2.8%) and India’s 10 years bond yield(7.25%) is quite a lot, indicating strong economic growth in India as compared to the US.
- Corporate leverage is the lowest in the past 10-15 years, indicating much healthier balance sheets. The share of corporate profits in our GDP today stands at approx 2.5% whereas, during the peak of the previous bull run from 2003 to 2008, it was around 8%. India is on the cusp of a long term corporate earning’s recovery cycle.
- With the NPA cycle clearly behind us and Covid restrictions almost gone, rise in corporate profits will lead to capital expenditure(CAPEX) thus increasing the credit growth in the times to come, adding to the GDP.
- Boost to creating National Infrastructure. The National Infrastructure Pipeline (NIP) for FY 2019-25 is a first-of-its-kind, whole-of-government exercise to provide world-class infrastructure to all of us and improve our quality of life. Under this theme, a total of 2482 infrastructure projects are already under development at a total outlay of $1966.21 billion. This massive spending by the Government would not only create many million jobs for the youth but will also contribute towards GDP significantly.
- Speedy Policy Implementation by the Government. Major reforms (like Demonetisation, GST, the opening of bank accounts, etc) undertaken by the government of India during the last 5-6 years have started showing positive results for the overall Indian economy. Welfare measures by the Government now can directly reach the beneficiaries thus saving huge amounts of money on leakages (courtesy opening of 30 crores of Jan Dhan bank accounts during demonetisation). Any policy decision can be implemented in a very short time frame by the Government due to the linking of bank accounts with PAN, 110 crores of AADHAR and 100 crores plus of mobile connections, the recent example being the corona vaccination to 185 crores of people in last year plus.
- Buoyancy in tax revenues. Tax revenues were much higher than estimated in last year’s budget. GST collections have been the highest ever since it’s implementation.
- Investment in the Private Sector aided by PLI. Private sector investments are getting a major boost, primarily because of recently announced incentives by the Government of India in the form of production linked investments(PLI), full capacity utilisation due to massive increase in consumer demand, prevailing low interest rates(marginal increase won’t affect), and deleveraged balance sheets of corporate India.
- China + Factor. Ever since the outbreak of Coronavirus, there is a growing consensus in the world to reduce dependency on China and have an alternative supply chain. With our vibrant democracy and demography in place, India is a preferred place to establish an alternate supply chain to China. With corporate taxation reduced to almost the best in the world during Sep 2019, and now with the additional incentives in the form of PLI, we are almost certain to capture the world’s best manufacturing facilities getting created in our country. India’s arms export has grown six times since 2014. India has become the second largest manufacturer of mobile handsets in the world in terms of volume with 200 units manufacturing these mobiles, up from 2 units in the year 2014
- India’s growth is not dependent on the growth rate of the US due to the following factors
- Local consumption by a 1.4 billion strong population
- Low interest rate(marginal increase won’t affect much)
- Local businesses are strong and competitive with highly deleveraged balance sheets
- Better regulatory framework
- Growth oriented reforms and policies by GoI
However, inflation caused due to energy globally may be a cause of concern for us. Higher oil prices may impact us to some extent but with net positive export of software and service industry, this impact may be marginal.
- With 60,000 cr of selling by foreigners in Mar 2020, the Indian markets fell by 35%(read Nifty). Now, with around 2 lakh crores of selling by foreigners in the last six months, the market(read Nifty) has fallen by around 15% from all time high. We are getting less dependent on foreign money. There have been a large allocation to equities by the Indian house hold savings. By one estimate, Demat accounts have increased from around 2 crores to 6 crores since Mar 2020.
- Indian stock markets have performed much better than other world markets in the last six months or so.
- High inflation is a testimony of strong growth. Equity is the only asset class that can beat inflation and give us returns in line with nominal GDP(Real GDP+Inflation). With India expected to grow at 8% and with 6% inflation, we can expect around 14% RoI. Historically, Sensex has given 15% CAGR over the last four decades, in line with nominal GDP.
- Ongoing volatility in the market gives an excellent opportunity to invest more in equities, preferably through mutual funds. If we are not invested in equities as yet, now is the time to start.
- Always invest keeping in mind your financial goals. In the long term, equities are the best option to generate wealth. Invest through Systematic Investment Plans(SIPs). This is the only way to capture market volatility and cost average the purchase price (When markets go up, NAV goes up and when the markets go down you get more units for the same price).
- Cut down on the market noises. If investing yourself, have a conviction on your selected picks, otherwise, take professional help. Trying to save a penny on commission/fees by not taking professional help may prove to be counter productive.