Economy In Trouble But Markets At A High, How?

6 min readNov 11, 2019

Everybody knows that SENSEX has surged 4230 pts in less than 50 days but very few of us are aware that 3,363 pts were contributed by only 10 stocks, then what about the rest of them? Various mid-cap and small-cap indices are still 15% to 40% below their early 2018 highs.

we now have a consensus that India is in a condition of economic slowdown and recovery will be gradual and slow. Some of the experts even think that ‘This slowdown is temporary’.

The FY2019 growth rate of 6.8% was the slowest in five years and Q1 FY2020 growth rate of 5% was a 25-quarter low. If the Q2 FY2020 growth rate also comes below 6%, which is very likely, it would mark a serious deceleration. If that happens, it would be the first time in seven years that India would be seeing GDP growth below 6% for two consecutive quarters.

The government has responded, though a bit late, to the challenging economic environment in India with appropriate stimulus. The big bang corporate tax cut has come as the icing on the cake of several stimulus packages announced earlier. The monetary stimulus provided by RBI through five rounds of rate cuts totaling 135 bps will start yielding results soon. Since inflation is very low, there is room for further rate cuts by RBI. Monetary policy acts with a lag of two to three quarters in India, and therefore, the beneficial impact of the monetary easing can be felt in Q3 and Q4. (Source ET)

The US Fed again cut interest rates on October 30, without signaling an accommodative policy. Earlier the ECB had announced QE 2.0. For the first time in 10 years, 20 central banks have cut rates this year, which is indicative of the slowdown in the global economy.

The important question is: How it will affect the stock market and our future investments?

If you see data, over the last twenty years, Nifty 50 earnings have grown by a much healthier 10% CAGR, even as Nifty 50 index grew by a similar 11.6% CAGR and it rarely happens that NIFTY earnings are less than NIFTY returns, but Over the past six years, underlying Nifty 50 earnings have grown by only 3.8% compounded annual growth rate despite this disappointing earnings growth, the Nifty 50 index grew by a relatively healthy 11.1% CAGR during the same period.

Means Stock Market is surging irrespective of slowdown and less corporate earnings. I remember the words of Nilesh shah “You could find value when the economy is totally bad and you may not find value when the economy is firing on all cylinders. Growth, capital efficiency, and governance are the three broad pillars on which any investment needs to stand on”.

So, if the money was draining out of the system by FIIs after Higher surcharge then who helped equity to come to this level, Answer is: Domestic inflows

As per data, even as FPI flows slowed after FY15, domestic flows into mutual funds picked up sharply from FY15 onwards and saw a noticeable peak post demonetization in FY18. The upshot is that over the past six years, strong domestic flows into equity mutual funds have helped equity prices overcome the sharp slowdown in earnings growth and register impressive gains.

So if your investments are based on strong fundamental analysis then you need not worry about the slowdown, weaker guidelines, and corporate earnings.

So, What’s the strategy?

As per knowledge, we can make the best strategy just by ‘Being aware’.

What may go wrong?
What may go right?
Final strategy

What may go wrong?

An alteration in the Fed statement brought out that “further rate cuts would emerge only if the economic outlook changes materially,” which is a negative for Mr Market.
If India’s GDP Q2 FY2020 growth rate also comes below 6% then FII outflow is expected.
Further slowdown in the auto sector will directly impact the GDP.
This sector alone employs 37 million people (direct and indirect), contributes 7.5% to the country’s GDP and 49% to the manufacturing GDP.
The government has already reached 92.6% of its budgeted estimates for India’s fiscal deficit in 2019–20. Therefore, the next six months will certainly be challenging for our bureaucrats to raise timely resources.

What may go Right?

The government is looking to scrap Dividend Distribution Tax and rejig slabs and holding periods for Short-and Long-term Capital Gains and Securities Transaction Tax for Boosting foreign inflows and improving market sentiment.
The corporate tax cut will have a long term effect on corporate earnings and they are expected to deliver better numbers in the upcoming quarter.
Due to this, we are likely to end FY20 with a growth rate of around 6%, which will be one of the good growth rates among large economies.
A bountiful monsoon this year will raise agriculture growth rate, mitigate rural distress to some extent and stimulate aggregate demand in the economy.
The positive impact of various stimulus measures announced by the government will be visible by the last two quarters of the financial year.
With strategic sales of BPCL and other PSUs, privatization will gather momentum.

“Government of India has also proactively taken policy decisions in response to the global slowdown. These measures would lead to a positive outlook on India and would attract capital flows and stimulate investments. The fundamentals of the economy remain quite robust with inflation under check and bond yields low. India continues to offer strong prospects of growth in the near and medium term.” — Nirmala Sitharaman, FM of India

Final Strategy

Source: https://upstox.com/open-demat-account/?f=HANP

Since there is an environment of uncertainty, investors should pick up stocks with great caution. Certainly, the bitten down sectors may witness an up-move and the ones that saw a good rally may linger at current levels.

Pharma, metals and mining, agriculture are some of the beaten-down sectors that should be considered from an individual stock picking perspective. They are available at cheaper valuations and, hence, can be good avenues to look at. Private banks and financials should be avoided currently.

Investors should remember that stocks are available at attractive valuations during periods of pessimism. Since we are in a pessimistic environment, there are very good shopping opportunities for the discerning investor.

If you’d like to add something then write to me at akshay.seth@paymeindia.in

Akshay Seth
Business Analyst, Payme India

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