Ongoing chain of events has led to markets correcting sharply in recent weeks. This has raised several doubts in the minds of equity investors and rightfully so. In these uncertain times, investors are undecided on the risk-reward balance of holding equities vis-à-vis other asset classes. Our assessment of the factors that are affecting investor morale and adding to the perceived risks in the Indian stock market include- 1) Rising inflation leading to interest rates hike, 2) Pervasiveness of the PSB scams, 3) Uncertainty over the outcome of 2019 elections, 4) High Market valuations and 5) LTCG denting the attractiveness of equities
We believe that all these are genuine concerns and it certainly should not be ignored by investors while taking investment decision. However, we are also of the opinion that structurally bull run is intact and that the current overhang on equities should subside as Indian economic growth accelerates. Having said that we feel, even in current Indian stock market situation all the aforementioned risks can be effectively minimized and dealt with by creating a diversified portfolio having select stocks that would have no or minimal impact of the risks highlighted earlier.
We want to highlight that Research and Ranking (R&R) portfolio performance to a large extent will remain immune to the risks highlighted above:
|Perceived risk||R&R Solution|
|Rising inflation leading to interest rate hike: With sustained growth in GDP, government borrowings may increase, resulting in rise in inflation. Interest rates are also likely to trend upward in response to increase in inflation.||R&R portfolio has a high weightage of consumption driven stocks that will have no impact on account of interest rate variations. In the Financial Inclusion space also, the stocks included have sufficient headroom available for margin expansion despite rising costs.|
|Fear that the recent PSB scams are only the tip of an iceberg: Unearthing of LoU scams has once again raised questions regarding the pervasiveness of this problem in our banking system and has therefore shaken investor confidence in the sector.||R&R portfolio has no exposure to the PSBs. We have instead included some high quality private sector banks with strong management pedigree.|
|Uncertainty over the outcome of 2019 elections: While most Indians support the reform initiatives undertaken by the Modi government, but many believe that implementation could have been better. This subtle change in perception about the ruling party may diminish its chances of winning with clear majority in the impending 2019 elections.||All the R&R portfolio stocks are centered around the secular domestic consumption theme and hence outlook on the same is unlikely to change basis whether Modi government is reinstated in 2019 elections or not.|
|High market valuations: It is perceived that markets are trading at high valuations and may correct further to reflect underlying subdued market fundamentals.||Aggregate R&R portfolio PE is well below 20-xs on FY20 Earnings indicating high margin-of -safety at these levels.|
|LTCG denting the net returns on equities– Introduction of LTCG would reduce returns earned on equity investment, making it less attractive compared to other investment products.||Yes, LTCG has impacted net returns on equities, however it is still the only asset class that offers superior capital appreciation benefits. Hence, even after adjusting for LTCG, equity returns are still far higher than other options available such as fixed deposits, gold, real estate, etc.|
In conclusion, we want to highlight that long-term investors should not get perturbed by the ongoing correction in the markets. Bull market is still intact, hence we would urge our clients to use these corrections to consolidate their position in the recommended portfolio stocks and not try and time the markets by waiting for the next up move.