A reduction in interest and tax rates are very positive for equity and during such periods they outperform other assets like bonds, commodity, gold and currency. Equity usually starts to do well when the interest rate reaches near the bottom of the cycle.
Till October 24, 2019, about 21 companies of the Nifty50 indices have declared their Q2 result. The numbers are encouraging with a PAT growth of 13.3 percent on a YoY basis as compared to the expectation of around 8 percent on the same stocks.
For broad indices like Nifty500, 117 stocks have declared results, similar traction with 14.5 percent growth in the consolidated PAT is seen. This is led by corporate tax reduction, better performance from sectors like banking and cost benefits to sectors like cement and FMCG. Muted performance is from auto and IT.
Noticeably better are numbers from the banking sector, which provide hope that India’s financial segment NPA problem is normalising. The Q2 result for the banking sector has been marginally better than expected due to the base effect, a reduction in provisioning and positive vibes over the resolution of NPAs.
The outlook for the future has improved due to an increase in liquidity and a cut in operational cost. The negative factor is that slippage is still occurring with stock specific issues. But given the attractive valuation, the banking sector will do well and outperform the market in the future. It seems that a majority portion of negative factors is largely digested in the domestic market today.
The equity market usually advances before the start of economic growth. The transitory lag between the equity market and economy could be in a range of three to 12 months, depending on the economic cycle. The private sector is not investing today since the capacity utilisation is at a decade’s low.
In India, the economic problem is a mix of structural and cyclical issues. The economy was slowing down in the last two years due to cyclical problems, which got extended due to structural issues. Structural problems are being resolved by initiating reforms. The biggest concern is the weak financial position of the banking sector led by NPA problem, which is at the peak level, and the market is hoping that it will vanish in the coming quarters led by reforms and faster resolution by IBC (Insolvency and Bankruptcy Code).
A reduction in interest and tax rates is very positive for equity and during such periods they outperform other assets like bonds, commodity, gold and currency. Equity usually starts to do well when the interest rate reaches near the bottom of the cycle.
In India, the repo rate is at a 9-year low of 5.15 percent and the RBI is likely to continue its reducing stance in the medium-term. Globally, the interest rate in the Euro region has been zero for a long time, but the economy did not improve, while in the US, it is just coming down from the 10-year peak as the economy started to slowdown.
In a nutshell, we have a mixed trend of a sharp reduction in India, an early reduction in the US and Europe at the lowest. However, India has an advantage with its reducing interest rate, tax reforms and a likely reversal in the economy from the second part of the year, hinting that equity will do well.
The market has been flattish during the week assessing the ongoing Q2 result which is marginally better-than-expected, till date. Given the trading holiday, volumes have reduced mirroring a conservative approach. Going forward, weak crude oil prices, positive global sentiments and further reforms from the government are expected to provide positive momentum.
Equity as an asset class needs motivation like growth and incentives for investments. During the recent period, the platform for the equity market has improved led by lower taxation, a reduction in the interest rate, and expectation of further involvement by the government to support the economy with more stimulus.
We will be in the early stage of this growth phase and volatility may prevail in between, but attractive schemes for the consumers, a boost from the festival season and accommodative factors like a fall in oil prices, positive vibes from global market and a likely reversal in the second half of the year could mean a positive momentum in the Indian equity market for the long term.
(The author is Head of Research at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.