Federal Reserve has increased their interest rates by a quarter of percentage point which is a strong sign of their conviction in US growth outlook and continuing economic activity. Our question is: With the visible improvement in the fundamentals of our economy, what is discouraging us from displaying faith in our growth story?
To help you look at the bigger picture, we have highlighted few points which suggest that there visible green shoots in the health of our economy, which should be taken into consideration while making investing decisions.
Acceleration in the leading indicators: The most recent GDP data for the quarter ended Sept17-Dec17 rose to 7.2% which is up by 0.7% on a QoQ basis. With this, the jump in the aggregate revenue and a net profit of 1,078 companies by approx. 13% and 27%, respectively year-on-year, is a sign of a strong pickup in the corporate earnings recovery.
Improving fundamentals of the recommended portfolio: The 9-Monthly result of all the stocks in our universe displayed steady growth in their fundamentals, which strengthens our belief in our investment methodology and the stocks growth potential.
Inexpensive valuations: Considering the continued progress on economic, fiscal and institutional reforms, we assign FY19EPS to be approx. INR 1900 and at about its long-term fair multiple of 18-20 times. This would imply index levels within the range of 34200-38000, which is an upside of 4-17% over the current levels. At the stock level, companies with sound fundamentals are expected to outperform Sensex over a long-term.
Irrespective of the glaring growth in fundamentals, you may ask the reasons behind the markets marking a fresh 2018 low.
The new tax regime for LTCG on gains above INR 1 lakhs would be effective for all equity transactions carried from 1st April 2018. That’s why it makes sense for many investors to book profits before 31st March 2018 to avail tax exemptions on their substantial gains arising from their long-term equity holdings. The same investors will re-enter markets to buy stocks post 1st April. Considering this, should we not leverage on these current attractive price levels to buy fundamentally sound stocks?
R&R take on the investments and markets ahead
We strongly recommend our investors to keep a long-term view and not indulge in speculation over the global scenario or much-prophesized state elections. The on-ground recovery in the fundamentals reflected through improved corporate health, revival in consumer demand along with the robust GDP data are the strong indicators that India’s structural growth story is resolute in a long-term. This in itself, is a great opportunity to enter the markets at a low level by investing in long-term business opportunities which have the potential to grow 5x, 10x, 30x or even more in the next 7-8 years.
The Sensex has grown from 400 to 39,000, while the GDP has swelled from 29,000 crores USD to 2.26 lakh crores USD in the last 30 years. There has been a global and domestic crisis before as well, and still, we managed to bloom.
So, let us conclude with this thought-provoking question:
India is expected to emerge as a $5 trillion economy in the next ~7-8 years. This means that the growth story is not going to stop anytime soon, and if that’s the potential, why don’t we capitalize on this opportunity to create maximum wealth out of it?