The eight ‘R’s that will drive equity

Staying put in the markets, even in the midst of volatility, could be worth it for investors

With the equity markets hitting new lifetime highs, the most important question in the minds of all market participants is: Is there more to go?

With the caveat that short-term movements in the markets are tough to call, there is much more to go in the medium to long term. Here are the eight ‘R’s that will drive the return from equities.

Reflation and Republicans

The global reflation trade that started in the middle of 2016 is well and truly on. World trade, both in nominal and real growth terms, is looking up and is synchronous in both developed and emerging markets.

The positive commentary from bellwether companies in the industrials space during earnings season augurs well for global growth. With a stable core CPI across the world, we are in a Goldilocks scenario globally with higher growth and stable low inflation.

Also, the rally (almost one-sided) in the US dollar and US equities at the end of 2016 was due to expectations of Trumponomics. As we are witnessing today, there are checks and balances from the Congress in general and Republicans, in particular, to get through with some of the agenda items of Donald Trump — like change in the current healthcare system, cutting of taxes excessively, imposition of border tax, etc.

Remonetisation and Reforms

Closer home, the effect of demonetisation is behind us. More than three-fourth of the previous level of currency in circulation has been restored. The high frequency data has improved over the past couple of months.

The services PMI is back in the expansionary zone. Auto sales have also recovered. Even with reduced RBI estimates on GVA to 7.4 per cent in FY18, India still stands tall among the other emerging market peers.

Similarly, over the past three years, the government has undertaken many reforms — JAM trinity, direct benefit transfer, fiscal consolidation, cooperative federalism and opening up of many sectors for FDI are the notable ones.

Going forward, the game changers will be implementation of GST and housing for all by 2022. There are other tough reforms which are work in progress, like unfreezing power sector through the UDAY scheme, resolving the banking NPA problem and continuing the fight against black money.

Rural India

Coming to rural India, the Central government has taken various measures to revive the rural economy. The Ministry of Rural Development had spent 24 per cent more in FY17 compared to 11 per cent in FY16. Food grain production and MSP increase in FY17 have been the highest in the past three years. Renewed crop insurance, soil health checks, etc., have found acceptance with farmers. Another good monsoon and hopefully a delayed and weak El Nino could help the rural economy.

Rupee and Rate Transmission

Post the taper tantrum in 2013, the rupee has been in a narrow range (60-69 to the dollar) which is quite commendable considering that other emerging markets (EM) peer currencies have been hit much more in the risk-off environment. This stability of the rupee is due to lower inflation, manageable current account deficit and higher forex reserves.

Though the banks were behind the curve when compared to the RBI, they cumulatively cut 185 bps base/MCLR rate for the last two years (considering SBI). FY18 will be the first full year when Indian corporates and consumers benefit from lower borrowing rates.

Rebound in Earnings

All the above factors should allow the EPS of Nifty 50 companies to grow by over 18 per cent in FY18. This is primarily led by autos, financials, metals and engineering. It is a fact that earnings have lagged over the last few years but the probability of double-digit earnings this year is high.

Due to GST implementation, there could be issues with continuity of business but should be overcome in a couple of months. Hence the earnings growth could be back-ended during the year.

With a potential of double digit earnings, the return expectation for a 3-5 year period could be in double digits from equities – the onlyinvestible asset class which has a high probability of such lucrative return.

Things are looking up globally after almost a decade. India, with its growth potential and reform process, should be a significant out-performer in terms of economy and markets.

Staying put in the markets, even in the midst of volatility, could be worthwhile for investors.









The writer is Co-Chief Investment Officer, Birla Sun Life Asset Management Company

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