Monday, January 26, 2015

Equity: Expectations for 2015

The equity markets is at an all time high, and has given 30% returns in 2014. Most people are under the impression that our markets have moved due to relentless FII buying. However, although 20% returns was due to PE expansion/liquidity, 10% returns was due to earnings growth.

India is in a sweet spot due to the following reasons:

  1. Have a strong, stable Government which is committed to reform.
  2. Falling oil prices. Oil accounts for 5% of the GDP. It is not only oil, but it appears that the Commodity Super Cycle with started in the 1980s may finally be over. This would help India’s manufacturing.
  3. Best demographics with a young working population
  4. There is still a very low penetration of durables in India. A small percentage increase in ownership of durables, would result in massive sales.
  5. Unlike other countries, we have no fear of deflation. Deflation is more difficult for government to handle. Japan has been trying unsuccessfully for the last 20 years.
  6. We are one of the countries who are at peak interest rates and are looking at cutting the same. This will improve Corporate India’s bottom line and spurt consumption.

The equity market is likely to continue to move up due to the following reasons:

  1.     Our GDP growth is still at 5.3 and we are looking at going back to 7% GDP growth by 2017.
  2.    Every $10 fall in oil prices boosts our GDP growth by 20 bps. Hence 1% growth should come from falling oil prices.
  3.      A well designed GST can boost GDP growth by 2%
  4.      Removal of slippages in Subsidies.
  5.    Corporate profits have historically contributed between 4-7% of the GDP. Currently corporate profits are at the lower end of the spectrum at 4.2%. EBITDA margins are at 18 years low – hence there is a huge scope for improvement. Falling commodity prices and interest rates will improve margins.
  6.      Government policy is affecting the factors of production
                   (a)  Land with Land Acquisition Act
            (b)  Labour with Labour reforms like 500 new trades included in the Apprentice Act, Firms employing less than 40 worker have some relaxation on the stringent labour laws, over time limit increased from 50 hour to 100 hours per quarter, night shift for women allowed,, etc
             (c)  Capital with FDI relaxation is areas like insurance, Defence, etc. Interest rates too are falling.
                  (d) Entrepreneurship – Government is trying to improve the ease the of doing business

4.     The Sensex is at all time highs. However it has to be kept in mind that in November 2004, the Sensex retouched a new high of 6100 (after February 2000) and then between that date and January 2008, when it touched 21000, the market kept on touching all time highs. You cannot miss out on this ride which if likely to happen again.

What should investors do now?

In Europe and the Americas, households prefer to put in 25-50 percent of their savings in equities. In India, the share is dismally low at around 3-4 percent. Indians invest in real estate, non-productive gold and fixed deposits. However it is with equity, can wealth be created over a long time.

Although it is good to know that equities future looks bright for the next 2-3 years, time in the market, rather than timing the market is what is important. HDFC Equity Fund was launched on 1 January 1995. In these 20 years there was the Asian Crisis, Pokhran blast and US sanctions, Tech bubble burst, Ketan Parikh scam, UTI crisis, BJP loses election, Lehman crisis, 2nd term for UPA, 2G, 3G and coal scam, QE 3 tapering warning, etc. In spite of this continuous turbulence, an investment of Rs 1,00,000 in HDFC Equity fund would now be worth Rs. 49,70,000 – and better still all returns tax free.

However, is should be remembered that investing is a plan and not a product. Although, the note is on the future prospects of equity, the plan would have to include some debt -  an asset allocation depending upon your risk profile and term of investment. It is only by sticking to the plan, that emotions of greed and fear will  not affect your investments. Otherwise see a Certified Financial Planner to assist you on your investment journey.