Stark contrast between India’s macros and equity market performance—Remembering Marilyn Monroe!
In the past 11 months, whenever the investor/analyst community has considered India from an investment point of view, the top points of discussion have been the lack of economic reforms, policy paralysis, stubborn high inflation rate, RBI unrelenting in lowering the interest rates, slowing private investment and the earnings growth of Corporate India compounded by wildly gyrating weak currency, widening twin deficits and the looming spectre of sovereign ratings downgrade—overall, a perfect cocktail for dampening the investor sentiment towards the Indian equity market.Marilyn Monroe’s famous quote ‘If you can’t handle me at my worst, then you sure as hell, don’t deserve me at my best’ perfectly fits the prevailing situation in India. And for those who did put up with the worst of India and did not lose faith, the rewards have been handsome. In just the past 11 months, the Sensex has returned a staggering 22% till date, amongst the highest returns in a calendar year over the past five years! Apparently, either analysts are overly pessimistic about ‘textbook’ headline indicators or investors are considering factors other than macros while investing in India or both! Overall the year’s performance has vindicated several of our beliefs.
India has been a ‘bottom up’ market Over the past one year, pessimism has increased exponentially, fuelled by the worsening economic environment. However, we tend to overlook that India has been a ‘bottom up’ market all along. A ‘top down’ approach can lead one to keep waiting for the ‘rising tide that lifts all boats’ and you never know when that elusive tide will come.Meanwhile, corporate India continues to recalibrate its strategies to the changing conditions. A case in point is that in the past period of rising interest rate regime, balance sheets of select Indian corporate have more or less not grown, which although has slowed earnings growth, in hindsight will appear prudent. Currently the cash-to-debt ratio of Indian companies is higher than in the previous downturn. As we go forward, with inflation and interest rates having nowhere to go