Friday, September 24, 2021

Businesses survived 2 World Wars, why worry about trade war or polls?

Since I wrote last in, the biggest macro headwinds for the Indian market have taken a ..

By admin , in Markets , at November 22, 2018

Since I wrote last in, the biggest macro headwinds for the Indian market have taken a few steps back. Crude oil prices are down from their recent highs and they keep going down, bringing down the USD-INR paid along with it.

Macro analysts continue to fret about the impending state elections, general elections next year, US-China trade war and, very recently, the US market fall. Somehow, I have always seen there is something or the other to worry about in the global economy. But as the world has seen, companies have survived and thrived over the last century despite two World Wars and countless natural and man-made calamities.

The challenge is that everyone wants to get rich within a short time. No one has the patience and mental fortitude required to hold on to good businesses over their business cycle. Business results, in general, tend to be mean-reverting, which means over time, great results become mediocre and poor results get better.

Now that quarterly earnings have mostly come in, they indicate a total revenue growth of 20 per cent on aggregate, and around 78 per cent of companies have a positive or flat growth. Earnings of the universe of stocks I track have been improving in last two quarters and, although everything is not hunky dory yet, things are not drastically bad as well. Valuations, however, are still on the higher side. Good businesses with long-term earnings visibility continue to be expensive.

Domestic mutual funds continue to see strong inflows. The share of equity-oriented mutual fund schemes is now 41.2 per cent of the industry assets as of October, up from 38 per cent in October 2017. Equity and equity-linked schemes attracted Rs 12,622 crore, besides Rs 55,296 crore was invested in balanced funds in October. Inflows into SIPs were at Rs 7,900 crore, up 42 per cent from last year.

A sustained inflow of retail capital into the Indian market, especially through mutual funds, is a good indication of retail participation in the equity market. This trend is unlikely to wane in the near future as more and more retail investors get used to their monthly SIPs. I see a lot of similarity between the India today and the US of the early 1980s, when the retail investment boom was fuelled by the 401(k) Plan. The 401(k), in my opinion, was one of the main catalysts of the biggest 20-year boom in the US market till the 2000 dot-com bust.

An investor makes money essentially from earnings growth and PE expansion. The case for PE expansion in India, as of now, seems limited, as we are already above the average historical P/E. In the near future, incremental returns are more likely to come from earnings growth. So, as active investors, we need to focus on those businesses which can generate above-average earnings growth. Some sectors such as chemicals, hotels, paper, IT, optical fibre and cables seem to be doing well and should be kept on our watch list for deeper study.

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