Diwali crackers to light up a raging bull market

Published: October 25, 2019 3:50 PM

Even a weaker economic growth with high quality of earnings looks very promising on a large base that our country's corporates have.

stock market, stock market investment, Indian economy, Demonetization, GST, RERA, IBC, NCLT, income tax, bull market, DiwaliWhile in the very near-term shares can move up or down depending upon liquidity and sentiments, over a longer period of time equity valuations will always mimic the fundamentals of the economy.

Diwali, our Festival of Lights, has always been a symbol of prosperity, happiness and well-being. It is also a great time to review your investments and discuss future prospects. By any yardstick, our economy is undergoing humongous and unprecedented changes. During the last 5 years, these are some of the disruptions that the economy has been subjected to:

  • Demonetization
  • GST
  • RERA
  • IBC and NCLT
  • Massive drive against cash economy
  • Massive cleaning up of NPAs
  • Strict vigilance and enquiries initiated against bad practices in banking and loan approvals
  • Enquiries against malpractices of auditors and credit rating agencies
  • Dismantling of powerful broker and posting lobbies in Lutyens Delhi, including arrest of many influential fixers and lobbyists
  • Arrest of many businessmen and real estate tycoons

I am not saying that all that is happening is right and justified. Disruptions of this scale can never be fair and implemented perfectly. Also, obvious political angle is there in many of the above moves. Nevertheless, whether right or wrong, these changes are taking place and causing a havoc in the eco system. A South Delhi-based jeweller yesterday told me his sales are down a whopping 50% in this festival season. An environment of fear and uncertainty is surrounding nearly the entire trading and industrialist community. Bankers are either not lending at all or being very choosy and extremely cautious in lending, NBFCs are mostly out of business and discretionary spending is being curtailed everywhere. Needless to say, jobs are also not being created. In short, we are in a complete state of transition and the accompanying turmoil can and should not be ignored.

Now the only thing is there are two anomalies:

1. We are still growing at 5% despite all the doom and gloom. This may be because the process of slowing down is gradual and still not complete. However, with the IMF Chief Economist predicting a 7 percent growth for India in 2020, the slowdown is not likely to last long or be severe by any stretch of imagination.

2. Also, the stock market at least at the index level is trading at just about 5 percent below its all-time peak. In terms of valuation the main indices are trading at 20 times FY20 earnings which is at a premium to the long-term average of 18.5 times.

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While the first phenomenon can be explained by the general resilience of the Indian Economy, a very pertinent question is, why is the stock market ignoring all the pain in the economy? While in the very near-term shares can move up or down depending upon liquidity and sentiments, over a longer period of time equity valuations will always mimic the fundamentals of the economy.

There can be many reasons and interpretations for this rather resilient and bullish stock market. However, what is certain is that the market is seeing something which is obviously a game changer. The game is changing in the way India is going to do business going forward. From the license raj, we slipped into an era where the entrepreneurship and success of Indian Businesses still largely depended on government patronage and circumvention of laws and governance rules.

Innovation and sound business models were less important than finding loopholes to exploit for business success. Managing to secure a bank loan, especially from a PSU bank was the key to amass wealth. Servicing the loan was not as important as ensuring that the banker would keep evergreening the loans as and when the need arises. Generating bogus book entries to hoodwink tax and other compliances was the expertise which ensured business growth.
Auditors, credit rating agencies, tax officers, regulatory bodies and other institutes of compliance were all on board in this circus of corruption. Power brokers and lobbyists were very important part of the eco system. Whatever be the political leanings, one has to admit that the current regime has made a serious effort to clean and sanitise the system. Reason why a majority of businessmen are unhappy with this regime is partly because now tax evasion, bending rules and getting concessions from the government or the bankers are no longer a done thing. There is also the obvious economic slowdown also which is making the business community unhappy.

However, at the same time, we are certainly moving towards a fair and transparent regime. To say that all forms of corruption and unfair practices are gone is clearly incorrect. To some extent malpractices are there in every economy but in the developed world these are exceptions rather than the rule. We certainly haven’t sanitized our systems as well as the developed economies but clearly, we are moving in that direction.

Diwali also is an occasion to clean our homes and surroundings. This Diwali we have added the way we do business to the list of things being cleaned. While it causes a lot of pain and anger in the short term, we know in the long run it is for the good of not only trading but also the nation as a whole. For stock markets, this is particularly a very good development as the quality of our earnings is certainly improving. Hence, even a weaker economic growth with high quality of earnings looks very promising on a large base that our country’s corporates have. This clearly explains the resilience which our bourses have been displaying. More importantly, this majorly improved standard of earnings is a beacon of hope that a great, equity bull market is about to bloom on our bourses. The wealth goddess Lakshmi is all set to enter the households of equity investors. Make sure your portfolio is lit with quality stocks to receive her continuous blessings!

(By Ashish Kapur, CEO, Invest Shoppe India Ltd)

(Disclaimer: These views are the author’s own. Please consult your financial advisor before making any investment)

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