How to deal with Market Volatility?
Indian markets surged nearly 36% from 26595.45 on January 2nd, 2017 to 33848.03 on December 28. 2017. The upward movement in the market resulted in expensive valuation for the Indian market as assessed by price-to-earnings (PE) ratio which was hovering at around 22-24x forward earnings and is a premium of nearly 25-30% when compared to the historical highs.
In 2018, the rally continued with valuation premium increasing further and the Sensex breaching the 36000-mark for the first time. While the rally continued, the market pundits warranted about markets being over-valued and indicated of a market correction that was long due. January 17, 2018, marked the change in trend and the benchmark index started south (see charts below).
BSE Sensex performance since 2017
Note: as of February 9, 2018
The market volatility increased and it was more to do with the different expectations and speculations around the Union Budget. The fall became more prominent after February 1, 2018, with the re-introduction of long-term capital gain tax (LTCG) in the budget that spiked a rapid sell off for profit booking. The fall continued for longer than expected and the primary reason, per us, was more to do with the global cues.
- Rising concerns around the interest rate in the US – Interest rate and bond yields have always remained a concern for an equity investor. Investors tend to move out from stocks for returns in the bond market. The new Federal Reserve Chairman signalled raising interest rates later in the year and scrapping the policy of cheap money. Investors fear that with rising interest rates while the corporate earnings will dampen it would positively impact the bond yield. This fear sparked a panic sell-off in the global equities with the US leading the fall.
How should you deal with this Market Volatility?
We, at WealthTrust, believe that Indian market was overdue for a correction. While the fundamentals remain intact, the best part of such corrections is that an investor gets to invest at a discount. Any such sell off, according to us, is a result of short-term emotions that disrupt the market particularly the investment thesis that is otherwise supported by fundamentally sound and robust economy. A long-term investor should ideally utilize such sell-off as an opportunity to add more to the existing portfolio as India provides one of the most compelling growth stories currently.
What does the fundamental say about India?
We believe any assessment in relation to valuation is generally based on near-term estimates of earnings that, in reality, mislead an investor. An investor, under ideal circumstances, should view the premium paid for acquiring an asset in the context of where asset values are globally relative to their historical averages and relative to where we are in the earnings cycle. For the Indian market, the past decade has witnessed muted single-digit local currency earnings growth that kept corporate profits as a percentage of GDP at historically low level. However, with the revival in the economy from past one year and more so after implementation of Goods and Services Tax (GST), the earnings are expected to finally accelerate to 15 – 20% growth that would narrow down the premium. Having said this, we also believe that India’s macro outlook currently is one of the best among emerging markets and is in fact much better than any time in the past decade. India, to us, is a classic example of an economy with many idiosyncratic domestic factors that are less impacted by a headwind of slow global growth. We believe, if the government can continue to push through and execute critical reforms such as improving ease of doing business, expanding manufacturing capabilities, leveraging technology and building infrastructure – there will be ample reason to be excited in this market. The economy has potential to at 7-8% real growth for the next decade even with a normally functioning government.
It is expected that around 200 million Indians will be entering the middle-income bracket over the next decade which could translate to manifold growth in discretionary spending thus would certainly provide a boost to sectors such as electronics, tourism, automobiles, lifestyle and the likes. Also, the rising penetration of non-cash payment coupled with Goods and Services Tax (GST) could accelerate the shift from unorganized segment to organized segment. Furthermore, we believe, a massive infrastructure build-out is already underway and is reaching crucial moment with the push coming from the government by schemes such as Smart Cities Mission, Bharatmala Project etc. This could translate to growth in sectors such as Industrials, Materials etc. Lastly, in India, the Information Technology sector is also undergoing a seismic shift where the IT services exporters deriving the majority of their revenues from the US and the European markets are not shifting focus on consumer-facing businesses.
To conclude, we believe, all these factors when combined together provide a compelling growth story for the Indian economy and it is, thus, now a good time to invest in India with a long-term view.
So don’t worry about this short term Market volatility and think long term.
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