Resolution of structural issues would propel multi-year bull-run in Indian equities
In the past few years India has gone through one of the most severe economic slowdowns in the post-liberalisation period of the Indian economy. Policy paralysis at the Centre, ballooning twin deficits, lack of fresh investments, falling demand and rising inflation resulted in a slowdown in the GDP growth rate to the decade low level of sub-5 per cent in 2014.
Now, with a change of guard at the Centre and the BJP getting a clear majority, things have already started looking up. The mood of the nation has changed from a state of despair and despondency to optimism and hope. Prime Minister Narendra Modi has made it clear that his government will focus on good governance and is committed to restoring business confidence and propelling economic growth. He has kept his ministry lean and has structured his ministries to expedite the decision making process – setting a 100-day agenda for each ministry. With the right noises coming from the PMO and the urgency with which the government has started tackling key issues, there is a high level of optimism and confidence in the minds of investors. They are expecting a strong revival in corporate earnings over the next few years with GDP growth scaling back to the 6.5-7 per cent range in the next couple of years.
Indian markets have broken out of the longterm trading range and are making new highs every passing day. Mid-caps have started outperforming large-cap indices. Foreign investors have invested $9.35 billion since January 2014 and $4.1 billion since 1 May 2014 in Indian equities. Huge liquidity is waiting on the sidelines to come into the markets. Retail investors have slowly started making a comeback. There is left-out feeling among domestic investors who had exited the markets on every rise before elections. These investors are waiting for the correction to re-enter the markets.
This breakout has come after a very long consolidation phase. During this time, it was the traders market. Investors with a long-term investment horizon were punished as their portfolios yielded sub-par returns. Mid-cap portfolios saw severe erosion in values. The ‘Buy and hold’ strategy failed to work. Retail investors started doubting the rationale of long-term investments into equities. The definition of a medium-term investment horizon was reduced to a couple of months and long-term to 6-12 months. Markets traded in the broader range of 4500 and 6300 for four years between January 2010 and February 2014, before breaking out of the long-term range in March 2014.
The NIFTY broke all-time highs amid scepticism and uncertainty and moved into new uncharted trajectory in anticipation of Modi as India’s next prime minister. Since the announcement of NDA’s strong victory on 12 May, Indian markets have constantly been on the rise. The CNX NIFTY and CNX Mid-cap Index have gained 11.6 per cent and 23.6 per cent in last one month.
Indian markets are now positioned as they were in 2003, at the beginning of the previous bull run. After a long consolidation period from 1997-2003, the markets broke-out of the long-term range in 2HFY03, breaking all-time highs made during the dot-com bubble. The momentum further continued post the UPA government’s victory in the general elections of 2004. Between 2004 and 2007, NIFTY was in a structural bull phase with a special focus on the infrastructure and power segments. The NIFTY almost quadrupled in value from around 1600 levels to 6300 levels.
Indian equity markets are once again staring at a multi-year structural bull run. With a stable government at the Centre, there is no better time for long-term investors to take exposure to equities with a long-term horizon. This is the time to pursue the ‘buy and hold’ investment strategy instead of focusing on trading gains. Every dip in the markets should be used to buy equities.
This article was originally published in Business India Magazine.
Write to us at news@valuelineadvisors.com
Disclaimer: The views expressed in this article are personal and the author is not responsible in any manner for the use which might be made of the above information. None of the contents make any recommendation to buy, sell or hold any security and should not be construed as offering investment advice.