How these event and ideologies will shape up and what will be the eventual outcome over the long term is difficult to assess or forecast at this point of time. However, these events on many occasions may witness uncertainty and volatility leading to an opportunity for value buying of equities.
Coming closer to our domestic market, there were two defining trends in the financial year 2016-17. There was an unprecedented event in the form of Demonetisation. While there are equal convincing arguments on both sides relating to the move, the key point is that this is a move towards more formalisation of the economy followed by GST which again will give a boost towards the organised industry and bring more organisations under the tax net. The election win of BJP in UP and Uttarkhand certainly boosted the presence of the ruling party in the relevant states and the Upper house and help in taking more effective decisions.
Positive Economic Reforms:
In terms of policy and reforms we do see continued reforms in multiple areas, we are seeing increased pace of roads construction. Emphasis on efficiencies in railways, focused emphasis in dedicated freight corridors, port and shipping. Focus is on efficiencies and more accountability in PSU enterprises. Further there have been better capital allocation policies leading to increased payout of cash and tax efficient buy backs. In addition, consolidation in PSU starting with merger of SBI and its associates, multiple solutions being proposed for tackling the NPA issues, significant financial inclusion. One of the positive outcomes of Demonetisation was rejuvenation of Jan Dhan accounts with funds flow and boost to digital banking: multiple initiatives being taken by NPCL to boost digital economy, which will lead to a more efficient and cost effective way of conducting transactions. Moreover in the area of Power sector reforms, more and more states have participated in the UDAY programme, which will ultimately lead to reduced losses in power and strengthen India’s power distribution system. Simultaneously, multiple initiatives are being built around AADHAR.
Value Opportunities
Businesses always go through cycles. We saw significant excesses in terms of capacity creation in capital goods, infrastructure and metals sector during the years 2004 to 2007. One of the ways to determine excesses in a particular segment is to “Follow the Credit”. We saw a huge amount of credit flowing to these sectors. The extent of excess were such, that even today there are significant excesses capacity in sectors like power. However, the subsequent collapse, gave us an opportunity to invest in some of the great business franchises which had component of annuity revenues and hence less volatile cash flow, like metal commodity, stock and some banking stock at great valuations. A similar scenario was presented in the Real Estate segment, due to significant excess in inventory, which persists even today, some strong brands were available at good valuations.
Going forward
On the general market scenario, we see a paradox in terms of the underlying economy and the equity markets. While the underlying economy continues to be impacted due to underutilisation and excesses in capacity, the equity markets are buoyant due to favourable policy and economy trends, which will play out over the medium and long term. However, this buoyancy has led to increased competition for buying stocks, resulting in inflated stock prices. Further global and domestic liquidity remains high and is another reason for high stock prices.
Conclusion
India continues to have the potential for strong growth forward. There is however under-penetration in almost each and every seg-ment, be it infrastructure, vehicles, apparels, white goods, logis-tics, information technology, education, etc. It is believed that as our country grows, people will demand a better standard of living, leading to increase in consumption of various goods and services. Use of information technology will only help India to leap frog at faster pace. Efficient governments, regimes will only help in accelerating these goals whatever underlying demands remain irrespective of government. We see some challenges in form of increasing global protectionist measures. On the domestic front there could be temporary hiccups in the complex implementation of GST.
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