1. LIQUIDITY
|
•
|
FII broke all records in selling during October 2024; some of the reasons are:
-
|
Sell India to buy China due to the Chinese stimulus and cheap valuations.
|
-
|
Valuations in India are excessive.
|
-
|
US data looks positive, resulting in a rising dollar index and yields, which is negative for Emerging markets.
|
-
|
Indian Corporate earnings are definitely slowing down.
|
|
•
|
Domestic Mutual funds have been holding record levels of cash - about US$ 16 bn - and have been buying equities in this period. So, the fall has been limited despite massive FII outflows.
|
|
•
|
There have been many IPOs, including the Hyundai India IPO, which was the largest in our history. Further, Promoters and Venture Capitalists have been selling a part of their stakes at these high valuations. This has sucked liquidity out of the markets. The Equity Issuance pipeline is heavy going forward in November.
|
•
|
However, the retail investor has been a huge source of liquidity for the market. In the last 1 year, the Mutual fund industry has added as much Asset Under Management as in the previous 10 years. Furthermore, a large part of the inflows come from Systematic Investment Plans - Rs. 24500 crores. Over a year of SIPs amount to US$ 35 bn, and there has never been a year in which the FIIs invested that amount.
|
|
|
2. SENTIMENT
|
•
|
In the last 3 years, there have been as many new investors as there were in the number of investors in the whole period until that date. Only 35% of the investors have more than 5 years of experience. The buy-on-dips strategy has always worked in the past, and we have to see if the cor rection deepens the behaviour of these new investors when they start seeing losses in the portfolio. Since 2014, there has not been a negative calendar year in the equity market - and it is hoped that investors can take a deeper correction. Further derivative losses will multiply.
|
•
|
93% of the savings are made in instruments which do not give a positive real return (after inflation and taxation).
|
|
|
Real returns are essential to creating wealth, and there is enormous scope for penetration to get a part of that 93%. Awareness of the need to make real returns is rising.
|
•
|
Expectations were going wild as people were expecting 2-3% returns in the markets every month - and this correction is a very healthy reality check.
|
•
|
Many SME IPOs have been raising funds easily despite losses and a lack of proper business plans. Investors are likely to lose in companies with weak balance sheets. This shows that when bad companies can raise funds, there is greed in the market.
|
|
|
3. VALUATIONS AND CORPORATE EARNINGS
|
•
|
Ultimately, over the long term, returns depend upon corporate earnings. However exciting the last year's returns have been - 5-year returns have been 16%, 10-year returns 14%, 25-year returns 15%, and 40-year returns 15% - so that is the base.
|
•
|
There has undoubtedly been a slowdown in Corporate earnings in the last quarter. Reasons could be the longer Shradh period, Government spending curtailed because of elections, or heavy, extended Monsoon. The Festive season has now started and we will have to watch closely at the next quarter earnings.
|
•
|
Many of the FMGC (Fast Moving Goods companies) have come out to say that urban purchases have fallen. 2 wheeler sales have fallen, and white goods sales have fallen. 65% + of the economy is consumption. There has been a clear "K" shaped consumption pattern, with luxury goods doing well. Rural consumption is showing a small uptick, and hopefully, with a good monsoon, it will expand.
|
•
|
The pace of corporate earnings decline is a bit alarming, especially when markets are at all-time highs and valuations are expensive, so expectations of earnings growth are high.
|
|
•
|
States have been announcing welfare schemes - but putting more money in pockets is inflationary and not long term sustainable. The government has led the Capex cycle, but States and Corporate India need to follow, which in turn will restart the growth cycle.
|
•
|
Government spending is about 12% of the GDP. In the first quarter, the spending was curtailed because of the elections. In the 2nd quarter, Government spending was down 1.9%. To meet the full-year planned government spending, there would have to be an increase of about 25% in the 2nd half of the year, which will ultimately have a huge impact on corporate profitability.
|
•
|
This is more of a cyclical slowdown rather than a structural slow down. All the investments that have been made in Physical, Digital and Social infrastructure will pay off. Now, we are seeing an earnings slowdown, but the Government, corporate and banking balance sheets are in great shape, which was not the case in other cyclical slowdowns. A small part of the individual balance sheets are stretched, and RBI is trying to control that area.
|
|
|
|
WORRIES IN THE MARKET IN THE SHORT TERM
|
•
|
The US election and the policies that will follow are creating uncertainty. Further, there is beginning to be some doubt about whether the Fed's interest rate cycle will continue at the same pace.
|
•
|
Geo-political uncertainty has increased. Oil has behaved well so far, but we will have to see if there is an escalation.
|
•
|
Retail investors are hugely enthusiastic about derivative markets. We are the largest derivative market in the world, and the amount of leverage in the market is unsettling and unhealthy.
|
•
|
Corporate earnings slowdown.
|
•
|
With all the Middle East problems, crude oil prices have remained benign. If it spikes up, it would be negative for India.
|
|
The last 25 years have been fantastic, and the next 25 years look even better - notwithstanding this correction, which was expected and healthy. Momentum was moving the market, and there was no discrimination between good news and bad news. In due course, things will look good again, but expert stock picking will be needed as everything is not likely to keep rising.
|
We have had a Goldilocks (perfect) situation in our Macros. The current account deficit, fiscal deficit, and inflation have been kept quite stable; hence, our 10-year GSec bond yield has been stable. India's growth story is intact. However, our market's valuations have been too high, and this correction is healthy-maybe a little more correction and/or a time correction is still needed. "Patience is bitter, but the fruit will be very sweet."
|
|
|
|
|