The week ended September 3 was a momentous one for Indian equity markets – the National Stock Exchange’s Nifty scaled 17,000 points for the first time and the BSE Sensex was racing towards 60,000.
Before we start discussing anything else, digest this – year to date, the Nifty has yielded a return of over 23 percent; in the past 12 months, returns stand at a stunning 52 percent and from the lows of March 2020, an unbelievable 114 percent!
Just a first look at these numbers will tell you two things:
a) Money is always made by swimming against the tide. In March 2020, when everyone was in a panic and intent on selling, if you had gathered the courage and bought into the market, your money would have doubled. I know it is easier said than done, but the thumb rule to make money as an equity investor is simple – be greedy when the markets are fearful and vice versa.
b) Never judge valuations based on history. Just because some stock has run up a lot does not mean that the story is over and you have missed the bus. Do not look at past valuations and judge the business independently based on risk versus reward. Imagine this – Asian Paints was Rs 10 in 1999 and trades at Rs 3,333 today. A compound annual growth rate (CAGR) of 30 percent and I have never heard anyone say the stock is cheap, ever! So the lesson is, it’s never too late.
That said, let’s put things into the correct perspective. While the returns over the last year or so have been amazing, they do not exactly look as attractive when you take the long term into account. In the last six years, the CAGR return on Indian equity markets stands at a little more than 11 percent. The Indian economy has undergone so much turmoil and has witnessed one six-sigma event (an event that is extremely rare) after the other. The markets have actually not done too much in a long time.
However, things certainly look like they are changing for the better after a long time. We do believe that all the pieces of the jigsaw puzzle are finally falling into place. Here are some of the key ones:
a) Formalization: This has been an active part of the government’s agenda for five-six years, but failed to take off meaningfully for a long time. With the pandemic, the tide seems to have turned and at what speed! Sectors like consumption and building materials are experiencing this as we speak.
b) Deleveraging: In the last four quarters, Indian companies have been cutting costs across the board and the incremental savings have been used to deleverage their balance sheets. This essentially means that when the economy takes off, these companies shall be in a great position to grow alongside.
c) Government spending: For the first time, the government has put aside fiscal consolidation and is now spending on rural India and infrastructure. This seems to be a medium term agenda with which the central bank seems to be in agreement. This means growth is here to stay.
d) Low interest-rate regime: Inflationary concerns are clearly overhyped and transitory in nature. This makes us believe that in India, the low interest-rate regime is here to stay, making future capital expenditure a lot easier and cheaper.
The conclusion is that while the markets may have performed strongly over the last few months, there is no reason to panic yet. There is a lot of money left to be made in the Indian equity markets over the next two years. Just remember to invest in ‘Good and Clean’ companies in line with the ‘Coffee Can’ philosophy of investing in and holding on to shares of potentially great companies.
Happy Investing!
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