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Don't confuse economic resilience with market
resilience. Both are different.
In our mind we tend to equate the two. Over the last 20
years there has been no correlation. In March 2020,
when we had Covid in April, May and June, economic
activity was brought to a standstill. Real Estate and
Construction activity came down to zero. As it
constitutes 18% of India's GDP, the GDP fell 22% in the
quarter. In this period, markets started rising because
financial services were not disrupted. The IT sector
actually thrived, and these 2 sectors constitute half of
India's stock market.
From 1st January 2008 to 15th July 2013, 5 years, 7
months, 15 days, the Sensex was at the same level. In
this period the construction activity in India more than
tripled, GDP of India more than doubled, but the
market stayed at the same level, because we had the
Global Financial Crisis and Indian IT exports had
slowed down.
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So, there is no connection between the economy and the equity markets.
As mentioned, Real Estate and Construction is 18% of
GDP and 2% of the stock market. Financial services and
IT is 50% of the Stock market but it is not even 7% of the
economy. India's Travel and Tourism industry is larger
than India's IT, but there is no travel and tourism
related stock in the Nifty. Therefore, we can say that
there is no link between the real economy and the
equity markets.
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Don't confuse India's economic condition with that of other major economies
Other countries' economic condition does not affect
India much. About 17% of the GDP is exports and 83% is
domestic. 62% is private consumption and the rest is
Government expenditure, defence services, public
sector, and infrastructure - all together. The 17%
exports include IT, Pharma and Textiles. Chemicals are
somewhat sensitive to what happens globally. The 62%
private consumption is more of a function, of what is
happening in India, and in this regard India has been
resilient.
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Don't make inferences based on "per capita"
income/consumption in an economy with vast income
inequality.
Our average per capita is US$ 2400. When other
countries reached this milestone, their economic
growth gained momentum. But in India we are highly
unequal. 50% of India's population is below US$ 1000
and 20% is above US $ 8000 p.a. It's like saying Sensex
PE is 22 times just by average, but 1/3rd of the Sensex
PE is 60-70, which is in the bubble zone.
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Don't let knowledge of past cycles influence the
conclusion of the next one in a complex economy like
ours, where demography is changing dramatically
Sometimes experience helps, but in the markets you
have to unlearn a few things at times. In the days when
the G-Sec yields were 14%, getting a return of 18% in the
stock market was very normal. In 1991, 60% of the
Sensex was steel, cement, power and textiles with no
IT, Pharma, or Banks. In 2002, half the Index was IT,
Pharma and Real Estate while the Financial services
constituted 8%. Today financial services alone, is 40% of
the index. Steel, Cement, Power and Textiles which was
60% in 1991, came down to 25% in 2002. IT and Pharma
which was half the index in 2002 is not even 25% today.
And when we eventually reach US$ 5 trillion, Financial
services cannot be 40% of the index. Some other
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sectors that show higher growth rates will come into
the index. So do not let past cycles influence your
future understanding.
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Don't let the Western economic terms in a narrow
framed manner, judge the domestic conditions
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(a)
Unemployment rate: In India, it used to be 3-4%, but
now it is about 9%. The US announced that their
unemployment rate has come to 3.2% - a 27 year low. It
does not mean that 97% of their adults are employed.
Their employment rate is 71%, 3.2% are not employed
and are looking for employment, and the balance 26%
are not employed, but also not looking for
employment and hence not counted.
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(b)
In India, when the unemployment rate of adults is 9% it
does not mean that 91% of adults are employed. Just
37% are employed and 9% are looking for employment.
Unemployment rate rising is a fantastic news, as long
as the employment rate is also rising simultaneously,
as it means that more and more people are looking to
join the workforce.
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(b)
Market Cap to GDP - Higher Market Cap to GDP implies
that the market is getting overheated. Not relevant
here. Some companies going in for listing will increase
the market cap to GDP. India is unique where
founders/promoters own an average 54% of the equity.
In the US this figure is 6.5%. This is because of legacy
reasons, where India in the 1970s and 80s was capital
starved. There was no Private equity or Venture
Capitalists and we did not even have the Private banks.
Risk capital had to come from the entrepreneurs.
Pune's largest company is still unlisted. Further, as
mentioned earlier there is no connection between the
equity market and GDP.
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Don't look at investments in terms of Market
Capitalization.
This concept is recent. We only got a clear definition of
it in 2018 by SEBI. (Those ranked 1 to 100 being the
large caps, and so on) A US$ 2 billion company was
called a small cap by Goldman Sachs, and Midcap by
HDFC. In reality there are only a few sectors like
Financial Services, IT and Pharma where you have
choices in each sector. And these 3 sectors make up
2/3rd of Stock market's valuations. Investors think that
these choices are available in all the sectors but that is
not the case. Eg. There is no large cap in the Hotel
Industry. The largest Wealth manager in India is a small
cap stock. Same is the case with plywood, laminates,
and tiles. When you focus on the large cap stocks (top
100 stocks) that is 80% of the market capitalization. 30
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stocks in Sensex is half of India's market capitalization
and there you miss out on the rest of the 2000 plus
stocks available.
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Don't worry about what the foreign investors and
Mutual funds are doing
54% Promoters own the equity market. FIIs own 20%,
domestic institutions own 14% and the balance 12% is
owned by retail, HNIs, family offices all put together. Of
the 20% that FIIs own, 25% of that is in just 2 stocks. 86%
of FII investment is in 50 companies. So when FIIs are
selling we are talking of only a few of India's
companies. Not too different when it comes to mutual
funds - India has 46 Asset Management Companies,
300 different schemes and Rs. 24 lakh crore equity
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Assets Under Management. Considering all the stocks
held, 83% of mutual fund holding is in the top 100
stocks.
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EARNINGS IS THE ONLY THING THAT MATTERS - ALL THE REST IS NOISE |
In the last 5 years the markets have grown 12% p.a.
Looking at it from the low of 2020, the market returns are
looking higher. Net profits have grown in the last 5 years
by the same 12%. If you stretch it to 10 years; the earnings
have grown by 12% for the Nifty companies. However, that
is not representative of all companies. Financial services
have grown by 25% in 5 years and by 20% over the last 10
years. In the last 5 years India has produced more than 80
new billionaires. Most of the billionaires have come from
Specialty Chemicals - but there is no chemical stock in the
Sensex / Nifty. 41 chemical companies were in the small
cap category, and after the impressive growth, some have
now entered the Midcap category. How can you make
more returns than the Index is by ignoring the Index? If
the earnings grow 25% p.a., then your returns over the
long term will also grow 25% p.a.
Every company has a life cycle. Global statistics show that
9% of the companies live more than 50 years. Some get
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merged, acquired. Out of the 30 largest companies in the
Sensex of 1986, only six are still featuring there. Half of
those 30, don't even exist today. When people talk of
massive returns earned in stocks of Infosys, HDFC, etc.
from inception, it is forgotten that when the investments
were made, they were small cap which moved up to
midcap and finally got their place in Nifty.
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WHY IS IT A GREAT
TIME TO INVEST
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In spite of the market being at an all-time high and
elections looming next year, US slowdown and Europe
recession, it is a super exciting time to invest. If 17% of
India's economic activity is exports (lots of data points)
and 62% is domestic private consumption, which does
not have so much data, we need to know who is
consuming and what they are consuming.
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We are a highly unequal society. 142 cr. Indian
population, consists of about 29 cr. Households; and
income and consumption should be considered at
household level. 5% of Indians file tax returns but 20%
of Indian households file tax returns. If you consider all
the money in the bank, almost 92% is with this 5%. 1% of
the households own 40% of the wealth. Next 9% of the
households, hold 23% of the wealth and the next 10% of
the households own 21% of the wealth. Hence 84% of
the wealth of India is held by 20% of the households or
5% of the Indians.
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Wealth cannot be confused with Income, and Income
with consumption. Lack of money means low
consumption, more money does not necessarily mean
more consumption. When the richest incomes grow,
consumption does not necessarily grow but savings
and wealth increases. The fastest growing income
group is the middle class. (Rs. 25000 to Rs. 1 lakh
monthly income) In 2018 this group has broken out not
because of increasing income but because women in
this group are growing the fastest. 64% of the working
age men and 16% of the women are employed.
Considering the addition to the employment pool each
year, more than half of them are women. So if the
unemployment rate is rising along with the rising
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employment, it is a good news as that means more
people are looking for work.
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Most of our Foreign exchange is being used for
importing oil. In 2007 we spent US$ 150 bn. (16% of
GDP) on oil, when we were a US$ 1 tn. economy. Now
we happen to be over US$ 3 tn. economy and oil
imports are just 4% of our GDP. Now the 2nd highest
expenditure of foreign reserves of our economy, is
education. 10 years ago 85% of the students were boys
and 15% were girls. Last year, the number of girl
students came to 48%. 10 years ago 80% went abroad
for Masters. Last year, half the migrations were for the
undergraduate courses. 1/3rd of these students are
from the Middle Class families (Rs. 25000 to Rs. 100000
monthly income).
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Hence if the household’s income goes up by 25% with
the primary earner earning more and the secondary
earner (mostly the wife) starting with earning; the first
will result in more savings and the second will create
more consumption while also giving confidence for
taking credit. Last year for the first time, household
borrowing was more than corporate borrowing.
Although the overall household borrowing increased
last year (negative news), the average household
borrowing has reduced. More households borrowed
but Indian households did not borrow more (Very
different). 52% of credit is home loans. Average age of
home buyers has gone down from 43 years to 29 years
in Pune.
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More households are saving and investing - not each
household is saving more. SBI mutual fund has
outpaced HDFC and ICICI Pru Mutual fund because the
incremental SIPs are coming from small towns. SBI
Mutual fund was not even in the top 3 just four years
back. Earlier, 60% of the AUM was only in two cities,
Mumbai and Delhi. At that time, only 9% of the AUM
came from the cities that ranked 31 and onwards, in
overall economic and social rankings. Today, about
40% of fresh money is coming from these cities.
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Middle income growth is here to stay. Growth in
toothpaste sales in the last 5 years is 1.4% p.a., Soap
sales growth is 4% p.a. but Air Conditioner sales have
doubled in 5 years and so have shoe sales. (Not
brushing teeth or bathing more).
So there is no doubt about India's growth due to
private consumption over the next 5 years. Election,
Global Recessions - nothing can stop this middle class
juggernaut.
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The Equity market trend is still up. In every Bull Run, there
are regular corrections, and hence we should buy at each
fall. In October 2021 the valuations were 4 standard
deviations from the mean - and although there was no
meaningful correction, there was a time correction where
earnings caught up with the price. Currently, the standard
deviation is not even 1 standard deviation from the mean
and hence, the valuations are not overly expensive.
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The Federal Reserve did increase interest rates by 25 bps
this month. Our markets have continued to be range
bound.
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Gold and Silver are range bound and have been
consolidating. It is thought that during the BRICS
meeting in August, there may be an announcement of
some movement towards a BRICS currency, which is likely
to be gold backed. Gold/Silver holding is recommended
to be held as insurance as there is still a lot of global
uncertainty.
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