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Alpha Edge, September 2016 - This time is different...?

Another month with markets in a quandary over valuations of Indian markets seem to end. The month saw Equity markets continuing their uptrend with Nifty ending 1.7 percent higher for the month. FII’s pumped in almost $1.6 billion in the Indian markets for the month thanks to the freely available cash across the world.  

The world is struggling with reviving the growth and at the same time getting addicted to the steroid called credit while eagerly awaiting for what is called as the helicopter money. The worrying fact is that all of this has failed to produce the desired results and could lead into a liquidity trap, even as broad based markets are touching new highs and shrugging the bad news. Now with Fed stating that they are closer to resuming the hikes again, it could lead to a rationalizing of the overpriced markets around the world and we may see ‘flight to safety’ back in the game.

Despite the Modi euphoria two years back, the economic growth that we have witnessed can be best described as chugging along. This, despite several initiatives taken by the government. Although macro-economic factors are in a better shape as compared to 2-3 years back, the growth witnessed has been much slower than what was anticipated. The economy has been a witness to what we would call a two-speed recovery: Where consumption has done well, but investment has not. Public expenditure alone can only do so much to revive the economy. However, for the recovery to become more sustainable, the growth balance needs to shift more in favour of investment, mostly private investments.

Indian markets have been far from immune to the massive flows of liquidity coming from FII’s, thanks to the unconventional policies worldwide. Nifty is now within kissing distance of its all-time high as we come close to the end of a stretched earnings season. Nifty companies’ earnings (45 companies that have declared results) have fallen by 3 percent with a revenue growth of 4 percent. Markets entered the June quarter earnings season with higher earnings expectations, as the March results indicated hopes of recovery. However that doesn’t seem to be the case. We have seen Nifty touching new recent highs alongside downward revision in earnings estimate. This tells us that gap is widening between the prices and the fundamentals. There still are few positives to look forward to viz. effect of good monsoons resulting in higher rural demand, further increase in urban demand thanks to seventh pay commission and passing of the GST bill in the upper house and expectations of reduction in interest rates. The Indian market has largely discounted all the positive benefits well before the actual events (GST implementation and lower inflation leading to interest rate cuts). The current estimates of earnings growth is around 17 percent, which could only mean that we may see further earnings downgrade as markets come to terms with the reality.

In our opinion, the gap between reality (earnings) and perception (valuations) is eye popping, where the only game in town is to follow liquidity. SIPs are anecdotally pumping in around 4000 crs every month, mostly going into mid-cap funds. No wonder the Mid & Small cap index is above 50 PE and going strong. FIIs continue to pump in billions by the month. Justifying the moolah as world is staring at negative yields abroad with no low growth, whereas India is still yielding 7% while growing at 7.10%. Never mind the flattish EPS growth which Buffet always side will determine the prices eventually. We have no arguments with the market inching up relentlessly, just old fashioned worry enough, to step aside soon. We don’t think that it will be different this time.. because it never is !

 

Click here to read the report

Alpha Edge, September 2016 - This time is different...?

Another month with markets in a quandary over valuations of Indian markets seem to end. The month saw Equity markets continuing their uptrend with Nifty ending 1.7 percent higher for the month. FII’s pumped in almost $1.6 billion in the Indian markets for the month thanks to the freely available cash across the world.  

The world is struggling with reviving the growth and at the same time getting addicted to the steroid called credit while eagerly awaiting for what is called as the helicopter money. The worrying fact is that all of this has failed to produce the desired results and could lead into a liquidity trap, even as broad based markets are touching new highs and shrugging the bad news. Now with Fed stating that they are closer to resuming the hikes again, it could lead to a rationalizing of the overpriced markets around the world and we may see ‘flight to safety’ back in the game.

Despite the Modi euphoria two years back, the economic growth that we have witnessed can be best described as chugging along. This, despite several initiatives taken by the government. Although macro-economic factors are in a better shape as compared to 2-3 years back, the growth witnessed has been much slower than what was anticipated. The economy has been a witness to what we would call a two-speed recovery: Where consumption has done well, but investment has not. Public expenditure alone can only do so much to revive the economy. However, for the recovery to become more sustainable, the growth balance needs to shift more in favour of investment, mostly private investments.

Indian markets have been far from immune to the massive flows of liquidity coming from FII’s, thanks to the unconventional policies worldwide. Nifty is now within kissing distance of its all-time high as we come close to the end of a stretched earnings season. Nifty companies’ earnings (45 companies that have declared results) have fallen by 3 percent with a revenue growth of 4 percent. Markets entered the June quarter earnings season with higher earnings expectations, as the March results indicated hopes of recovery. However that doesn’t seem to be the case. We have seen Nifty touching new recent highs alongside downward revision in earnings estimate. This tells us that gap is widening between the prices and the fundamentals. There still are few positives to look forward to viz. effect of good monsoons resulting in higher rural demand, further increase in urban demand thanks to seventh pay commission and passing of the GST bill in the upper house and expectations of reduction in interest rates. The Indian market has largely discounted all the positive benefits well before the actual events (GST implementation and lower inflation leading to interest rate cuts). The current estimates of earnings growth is around 17 percent, which could only mean that we may see further earnings downgrade as markets come to terms with the reality.

In our opinion, the gap between reality (earnings) and perception (valuations) is eye popping, where the only game in town is to follow liquidity. SIPs are anecdotally pumping in around 4000 crs every month, mostly going into mid-cap funds. No wonder the Mid & Small cap index is above 50 PE and going strong. FIIs continue to pump in billions by the month. Justifying the moolah as world is staring at negative yields abroad with no low growth, whereas India is still yielding 7% while growing at 7.10%. Never mind the flattish EPS growth which Buffet always side will determine the prices eventually. We have no arguments with the market inching up relentlessly, just old fashioned worry enough, to step aside soon. We don’t think that it will be different this time.. because it never is !

 

Click here to read the report

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