Equities currently neither cheap nor expensive - here is why
Easy liquidity and low interest rates have gone a long way in supporting the larger economy and changes to the policy are inevitable and it is to be seen in terms of how the markets react to higher rates and lower liquidity support.
October 10, 2021 / 08:15 AM IST
It has been a magical run for Indian equities over the past year and a half. While there are optimists who think that the market is fairly valued, pessimists talk of the rich valuations and dangers lurking ahead in terms of high inflation and hence higher interest rates that can deflate the supposed bubble. So, will the markets keep running ahead or can one expect a precipitous fall? Are markets richly valued or are they fairly valued?
If one were to look optimistically, India continues to offer immense potential given its diverse and young population, a growing middle class, low penetration and low consumption by global standards and a rapidly digitising economy. All of these factors are likely to drive growth in overall GDP with a larger share of the growth going to the formal sector. A growing GDP is likely to positively impact per capita income and the resultant increase in consumption should drive corporate profits higher.
The period post the implementation of GST (Goods & Services Tax) has seen a rapid formalisation of the Indian economy and market share is shifting from the informal sector to their larger peers. India may also benefit from its focus to boost local manufacturing, and diversify away from countries like China. Supply chain(s) may see more manufacturing jobs being created in India. Our pledge on moving towards a carbon neutral economy may create immense opportunity in sectors such as renewables and electrification of automobiles.
Listing of consumer tech businesses is likely to create a further impetus that may encourage even more money flowing through venture capital and private equity to Indian startups. The government continues with their reforms agenda that has seen consolidation amongst PSU Banks, lower corporate tax rates, incentives for encouraging domestic manufacturing and the latest measures around the creation of a national monetisation pipeline and disinvestment of state owned assets. Investors are getting excited with the opportunities that lay ahead though growth in earnings has to measure up to the runaway growth one has seen in equity valuation(s).
Pessimists may see the glass as half full and say that India has flattered to deceive especially when it comes to earnings growth and valuations are expensive by historical standards. Markets have a way of running a bit ahead of what may happen in the future and what may appear expensive today may be of great value tomorrow depending upon the evolution of the underlying business.
India has seen massive value destruction in sectors such as telecom, airlines and PSU banks where a mix of policy led failures, low barriers to entry and outright frauds in the case of PSU banks have left investors and the exchequer poorer by thousands of crores. Also, given the divergence between the formal and the informal sector, it is to be seen what is the impact of the formalisation in terms of the job creation, since much of the job creation historically has happened in the informal sector.
Last but not the least, easy liquidity and low interest rates have gone a long way in supporting the larger economy and changes to the policy are inevitable and it is to be seen in terms of how the markets react to higher rates and lower liquidity support. Low growth and/or low earnings growth can prove to be the proverbial wet blanket at the party.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.