Indian Equity markets have been on fire after the 2020 fall. They have beaten many comparable EM indices. What’s going on?
Too much money: Governments / Central banks have printed trillions of notes. And we know that most of the markets are moved by central bankers. The current oversupply is leading to inflation, asset overvaluation, poor yields and low value of money.
Yields: With too much money around, inflation is an obvious result. Real yield of interest (ten-year yield less CPI) has become negative in many countries (in the US it is -4.77, India 1.87%, China 1.41%1). Most of the EU and North America are negative, whereas EMs are positive.
Available asset classes: FDs and fixed income assets are giving sub-optimal returns. Real estate has remained stagnant. Liquid asset classes – Equities and Crypto – have been HOT. Bullion has been good but has limits. In 1981: 10 gm gold = Rs.1,800; 1 kg silver = Rs. 2,700 and the Sensex = 170 points. Come to December, 2021: 10 gm gold = Rs. 48,000 (26 times in 40 years); 100 gm silver = Rs. 67,600 (25 times in 40 years) and Sensex = 57,000 points (335 times in 40 years).
India’s time has come: India is showing a promising position – in both perception and reality. On Deepavali – Bumper Gold sales, GST collection at Rs. 1.3 lakh crores; Corporate profit to GDP ratio at decade high; Exports rise for 11 straight months; Rs. 100 billion in UPI transactions; Card spends hit Rs. 2 lakh crores; New economy companies and Unicorns showcase remarkable innovation. Positive signs include dramatic improvement in infrastructure; Government stepping out of businesses (Air India, LIC listing) and likely to stay out of the way (balance between State control and private enterprise) and stop making silly mistakes (retrospective amendments).
Participation: New demat accounts opened in F.Y.20 were 49 lakhs with the three prior-year average coming to 43 lakhs; whereas, the new demats opened for F.Y.21 were 1.42 crores.
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1 2nd December, 2021
IPO frenzy: It is reported that $4 billion was raised in the PayTM, Nykaa and Policybazar IPOs. But more important is that $2.2 billion was on offer for sale in IPOs by existing investors. This activity has made entrepreneurs wealthy, added market cap and allowed wider public participation.
From my personal experience, Equity has given some of the finest returns to those who are invested for decades and even more if for generations. The combination of liquidity, growth possibility and legacy aspects are matchless. The mantra of the masters has been: Buy Good (select well), Track Well (conviction of analysis and regularity) and Sit Tight (patience to hold) – all these are critical. [‘Warren is pretty good at doing nothing’ – Charlie Munger; ‘Our favourite holding period is forever’ – Warren Buffett.]
The aim obviously should be to Protect Capital – Beat Inflation – Growth in that order. With the invisible tax called inflation attacking capital, one needs an asset class that beats this monster. The goal of ‘financial independence’ makes people want to be rich before they grow old. One Indian expert I read mentioned that one will need to have 50-58 times yearly expenses to be financially independent. Both these targets are impossible to meet unless one beats inflation and gets her savings to grow fast.
However, risks cannot be disregarded and valuations sans P/E seem ridiculous if not bizarre. Many believe that market value and earnings have no correlation. A recently listed company having an annual profit of Rs. 62 crores and Rs. 1 lakh crore market cap, traded at ten times the price of ITC when ITC profits are about Rs. 35 crores per day. In a lighter vein, I thought make up wins against cigarettes!
Elon Musk once said that Tesla doesn’t make cars. It makes factories that make cars. Great businesses / governments / countries don’t focus on producing a great result. They (should) focus on building a system that makes a great result inevitable. The India of our dreams will be that which makes great results inevitable.
Raman Jokhakar
Editor
