Feel Concerned About Market Valuations? Look At The Future With Confidence Starting Now
The market is always a good puzzle which at our end I enjoy solving. A good attitude in the markets is to try to understand what it is than trying to predict it.
All of us are concerned about the markets and why they have gone up despite the pandemic?
A good concern I would say. If we look at the top 1000 companies in India net profit has gone up in the region of 300-400 percent annually despite a fall in sales. This has largely been on the back of cost structures being adapted to digital functioning and decision makers becoming prudent in terms of planning spends at the ground level.
What lies ahead?
Trying to read the Tea leaves some observations come to the fore
There has been a fall in non food bank credit as per RBI press release in April and that remains to be seen how it picks up. Most likely a higher single digit credit growth for non food credit is possible on the back of the vaccination situation coming under control.
If it spreads in the rural hinterland there is a risk of GDP numbers not meeting the expected level as defined by the budget. However a growth rate of 6-7% appears reasonable under a worst case scenario as most businesses have adapted their business model to digital.
It is likely we can rebound to precovid sales for the broader economy in this financial year.A good thing has been the increase in direct taxation, however that contributes to a small part of the kitty .Indirect taxes contribute the major part and that trend is not very encouraging. Therefore the recovery needs to be watched cautiously as also hinted at by our Reserve Bank.
What needs to be done at a portfolio level?
It depends on your individual circumstances and the asset class options. It is simple, but not easy.
The sum up in the current scheme of things is Out of 500 plus views 27% prefer fixed income, 33% direct equity, 27% equity oriented opportunities and the rest real estate. Let us explore the major trends in each of them.
Fixed deposits/income: Globally the interest rates are not likely to go up in a hurry given the state of recovery. From a domestic point of view it is likely that interest rates may rise in the light of crude prices going up as we import inflation.
Our view is that short term funds are likely to do better.
Direct Equity: It depends on your orientation whether long or short term thinking. If you are a trader it depends on the trade structure. If you are an investor it is a mix of governance, industry niche related opportunities and management quality.
Equity oriented opportunities: Given the nature of earnings, valuations seem fair.However large cap has run up as a category and mid and small cap are looking interesting as an long term asset class.
Real Estate: Real estate on the outskirts on the residential side is likely to pick up as technology oriented jobs take over in this current digital age. Commercial is less likely to pick up as work from home seems to be a dominant trend at least in services.
What about private assets?
It depends on the entrepreneur and his/her acumen. Also the industry space they are working on, if market odds are in their favor.
The next two years are critical as digital infrastructure investments are likely to fructify for the economy especially the service sector. That said Aspiring India is likely to increase income as well as consumption over the next 7 -10 years leading to a 5 trillion dollar economy from the current levels.
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