Thursday, May 29, 2014

A Revolution in India

BJP won the elections with an overwhelming majority. Narendra Modi campaign focused on development and reviving the economy and the electorate has shown overwhelming support for this. Modi has proved himself in Gujarat. With a clear majority he will be able engineer structural reforms.
Modi has been fortunate enough to take over when the market is showing signs of bottoming out and there have been small signs of improvement. The Current Account deficit has definitely improved. The fiscal deficit was in line with the Budget, however that was the result of creative accounting. The weakening of the rupee as been arrested and with the prospect of the Modi government – has strengthened. Inflation is still high, but not going further higher.
“Modinomics” is likely to include the following:
·                         -   Enhance manufacturing competitiveness to create jobs.
·                         - Increase fuel availability to improve power generation.
·                         - Make railways a key enabler of the economy – “The Diamond Quadrilateral” project
·                          -  Maintain fiscal discipline to contain inflation
·                          - Improve agricultural productivity.
·                           -  Focus of tourism as an employment opportunity.
However, the equity markets have already run up by 31% from the multi-year range of 5500 of the Nifty.  Hence is there more to go?? Are the valuations of the market still attractive? To understand the markets, let us look at the last 10 years and also the next 10 years.

There are 3 things to look at when you study the equity market: GDP growth, Corporate profitability growth and valuations
     (a)   In the last 10 years the GDP has grown from Rs. 28.38 lac crores in 2004 to Rs. 112.13 lac crores in 2014 – CAGR of 14.72%.  Out of this 7.6% was real GDP growth and 7.1% was inflation. 
           (b)   Corporate profits have been in a range of 2% of GDP to a maximum of 7% of GDP. Currently it is 4.2% of GDP and in 2004 it was 4.7% of GDP.
           (c)   At 19+ times actual PE and 16.8 times forward PE the valuations are at the long term average. Between 2004 (Nifty-1772) and 2014 (Nifty-6704) there was a growth of 14.2% in line with GDP growth.
Hence realistically in the next 10 years:
  a. If the GDP growth is 13% and Corporate profits are 4% of GDP, and forward PE is at 16 times – all of the assumptions are very conservative – the Nifty will be at 22014.
 b.  Further, our GDP growth is at all time lows at less than 5%. Improvements in GDP growth and corporate profits, with increase the “E” – Earnings and hence the valuations will be more attractive.

400 years ago, the East India Company took the wealth of India by force. Currently they are taking over our wealth by stealth as FII holding in Indian companies have hit a record high of 25%.

Hence to get returns on your investment:
1           -  Believe in India’s future
2           - Have discipline to invest as per a plan.
3           -  Have patience to wait for the results. Investor returns have been much less than investment returns.
             -  Asset Allocation
5.          - Diversification
                          -   Re-balance


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