Making sense of market volatility

Bulk of the equity funds have struggled to beat the benchmark indices. But this too shall pass

Over the last couple of months, conversations, whether with colleagues, investors, financial advisors or even acquaintances, veer towards the gloom in the Indian equity market. Notes are being exchanged on what kind of setbacks one has seen in recent months and an occasional gleeful soul who seems to have correctly read this weakness.

The Sensex hovers at 34,432 at the time of writing this. That’s 11.4 per cent down from its peak of 38,897 in August 2018, but it’s still 1.8 per cent higher than the levels seen at the start of this calendar year 2018. However, the mid-cap indices have continued to suffer. BSE Midcap index is down over 17 per cent since January 1, 2018. The fate of small-cap index is worse.

The fact is, barring the benchmark indices of Nifty and Sensex, the broader market has been taking a significant brunt on the back of geopolitical events and local issues, which have meant hardening oil, weakening rupee and, thus, a not-so-good fiscal outcome. Impending local elections have also added to the volatility factor.

While over the long term (two to 10 years), the BSE 200 index has beaten the Sensex returns, over the last year (more specifically, last six months), the Sensex has beaten all broader indices, including the Nifty 50. Over the last six months to a year, the smaller and more concentrated the index, the better its return.

As a result, bulk of the equity funds have struggled to beat the Sensex or Nifty returns of the last one year. But this too shall pass.

The silver lining…

Despite the challenges, India continues to be the fastest growing economy in the world. The 7.5-8 per cent growth in recent quarters has come on the back of low inflation, indicating broader volume-centric growth, which is encouraging. The GST collections too are likely to normalise over the next few months. Recent data indicated that the last month’s collections were over ₹1,00,000 crore. Thus, despite the noise around elections, whoever comes to power in May-June 2019, is likely to inherit an economy with a monthly GST run rate of ₹105,000 crore. Bulk of the up-move on oil, rupee depreciation and US interest rate hikes seem already behind India. Despite our hardening view on interest rates, the scenario of runaway inflation in the country seems remote.

Encouraging data

India’s per capita income is slowly, but surely, climbing up. From $1,049 in 2008, India’s per capita income is a shade above $2,000.

It has taken India more than 10 years to create an incremental $1,000 per capita income.

Based on the simple rule of compounding, the next $1,000 per capita will get created in half the time, that is, over the next five years.

Thus, whoever wins the elections, and keeping in mind the oil and rupee volatility, India will be a $3,000+ per capita country by 2023.

This means an average Indian’s affordability will continue to improve and different businesses across India will continue to find growth avenues. While volatility may continue well into the elections; in valuation terms, Indian equities are much cheaper compared with last Diwali.

Sensex valuations are currently at 22.2x on a trailing P/E basis, 15 per cent cheaper than in January 2018.

Earnings are chugging along; GST blues are waning and corporate banks stress pool is on the mend. The market’s roller-coaster ride is more event-specific and will normalise as global nerves calm and the election fever dies down.

India’s progress on the path to higher per capita income should continue to provide wealth-creating opportunities to equity investors across sectors — finance, consumption, urban development, logistics and new technologies.

Do not miss the woods for the trees. With an eye on the long term, build your wealth brick-by-brick to get to your prosperity goals.

The writer is fund manager, Tata Mutual Fund

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