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India is undergoing a major transformation, which has, in the interim, impacted business momentum and demand in the economy.
Businesses that are unable to adapt to new changes – GST, higher competition, technology – are facing a threat to their survival, while others are facing a cyclical downturn.
Investments and exports have been sliding for some time now, but it is the steep consumption slowdown which is the new pain point.
Amid this gloom, the silver lining is that many SMEs in the manufacturing sector has received orders from global companies due to shifting of orders out of China.
The Indian equity market has begun to stabilise since early October 2019.
Though participation is skewed and limited, the market breadth has been improving, which suggests the worst could be over for the market.
Although there is still skepticism about a possible market recovery, given the global and local headwinds, we would like to stick our neck out and say that this may be a good time to accumulate quality stocks.
The government is acknowledging and acting in limited ways to try and reverse the slowdown.
Most negatives of the July Budget have been reversed, and there has been a big bang corporate tax cut – a relief to both listed/unlisted companies in the near term and a structural reform that would benefit all companies in the long run.
The decision to forego Rs 1.45 lakh crore revenue through tax cuts will have a positive impact on the country’s investment climate.
India is an emerging superpower with a dynamic economic climate.
This corporate tax cut will also help companies use the money saved to invest in capex or return the same to investors or consumers by way of dividends or price cuts.
This could create a virtuous cycle of spending, resulting in the revving up of the economy.
EPS estimates for FY20 and FY21 may go up and corporate earnings recovery, which has remained elusive so far, could materialise at last (although aided by government largesse for now).
RBI has been doing its bit by easing monetary policy and cutting repo rates by 135 bps since February.
These measures would most likely improve fundamentals of companies – which could improve flows and hence sentiments.
Valuations have become attractive, especially in the midcap and smallcap space, though select largecaps still continue to quote at high valuations.
Perhaps this reflects their relative invincibility in the disruptive times that we are currently in.
Investor sentiment has been low.
There has been widespread trust deficit; a lot of wealth has been eroded in the broader market over the past two years.
However, once the momentum picks up, investors will pick up their lessons and come back having seen similar recoveries from lows many times in the past.
Given the fact that fixed income alternatives are no longer lucrative (and carry their own set of risks), investors have little option other than allocating a sizeable portion of their financial assets into equities to earn above-normal returns.
Recovery in sentiments could also be swift.
Investors having burnt their fingers in the past in smallcaps and midcaps may now concentrate and invest a large portion of their financial assets in quality stocks even if they seem expensive.
They also need to bring down the expectations of returns from such stocks to more reasonable levels.
This coffee-can investing could result in low risk-medium returns for investors in an era when businesses are being disrupted and questions over governance standards have kept cropping up.
In times like this, investors can focus on creating a portfolio of quality stocks from different industries that can provide moderate returns with low overall risk on a combined basis.
They can focus on companies that are less likely to be impacted by disruptions or lending distress and focus on those which can benefit from higher fiscal spend expected in FY20.
This would include, among others, well-run consumer and financial stocks.
In times like this, investors tend to make the mistake of stopping SIPs as their current value of the SIPs invested do not seem to reflect appreciation even after a couple of years.
This attitude can be counter-productive.
Although a review of specific schemes is desirable, stopping SIPs will not allow rupee cost averaging for investors and they will lose out on this benefit when the market turns up.
In fact, they should be thinking of upping their SIP amounts during such slump.
The economy is seeing a transition through structural reforms such as a cleaner financial sector, goods and services tax and real estate regulation and development.
The economy’s core fundamentals are strong, and India is on track to become a $5 trillion economy by 2025.
We expect growth to tick up in the second half of 2019-20, courtesy the easy money policy of the Reserve Bank of India and the massive tax reliefs to corporates.
The second half of this financial year is expected to be better than the first half, as the economy recovers from the slowdown caused by various reasons, including impact of structural reforms undertaken by the Modi government and the crisis gripping the global economy.
The government had taken several measures, including cleaning up of bank balance sheets and merger of state-owned enterprises, which had been long pending and these steps would help.
The key areas of concern include a stretched fiscal situation, when you include state deficits and off-balance sheet items.
Deposit growth, household savings, reserve money creation and money multiplier are all well below ideal levels to effect a quick turnaround in the economy, but as household debt levels moderate due to lower consumer loan growth, these should start improving.
Trust deficit should reverse and bold quick policy decisions and faster delivery of justice will play a key role in achieving this.
