The stock markets have seen a see-saw movement in the last 8 months. There are many big events impacting the markets in the near term. We have tried to compile our assessment of the current scenario and factors impacting the markets.
We believe that the markets have shown a massive rally amidst the challenges in fundamentals and slowing economic activities. The following factors can be attributed to the rally:
- The correlation of markets to the economy has always been low (i.e. 0.3). As an investor, discipline is the key to make wealth.
- The markets are forward-looking and the full-year GDP estimate for this FY is -10%, which is what the markets have fallen from the peak. The economic activity has picked up pace from the complete lockdown phase of Q1.
- The markets currently are flush with global liquidity with the rate of interests globally at very low levels.
We believe that the stock market is for wealth creation and not for income generation so you have to invest in the right companies and wait for the company performance to eventually overcome the short term event-based volatility. We believe that investors should keep 20-30% cash and keep on investing in good stocks in a systematic manner.
We believe investors who are investing in markets for wealth creation should make the following promise to themselves:
- I understand that stock market investing is for wealth creation and not for short term income generation.
- I consider this investment as ownership in the companies.
- I will never leverage to invest in stock markets.
- I will retain sufficient cash/cash flows for my family expenses for at least 1 year, before investing.
- I am investing for a minimum of 3 years.
- I will not trade in markets (Buy/Sell frequently basis short term events).
- I will diversify my investments into multiple investment classes.
- I will not concentrate my stock market position to less than 10 scripts.
- I will always buy and sell in a staggered/SIP manner.
- I will not be bothered with volatility in my stock prices on a daily basis.
Updates from the Aatmanirbhar efforts (PLI Scheme, Import substitution)
In order to boost the domestic manufacturing and investments, Government has been working on Production Linked Incentive Scheme, Phased Manufacturing Program (to protect domestic industry) and comprehensive review of free trade agreements. We have already seen action from Government in PLI (for Mobile and Pharma API sectors), Anti-Dumping, Import Restrictions, Land Pooling, and Ease of doing business measures etc. Auto and components, large electronic manufacturing, pharma, chemicals, power equipment’s, textile, speciality steel etc. will be large beneficiaries from these efforts. We have already seen many large global players like Foxconn, Apple, Samsung applying for manufacturing in India under PLI. This will create huge jobs, addition to GDP growth and investment opportunities in the coming years. We believe that this will create billion-dollar opportunities for many listed companies and we will continue to align our research with the developments around this.
Liquidity in markets- Flows from Institutions (FII and DII)
Mutual Funds (Equity) witnessed net outflows for the second month in a row in August. Debt Mutual Funds have also seen net outflows in August. However, the Mutual Fund industry has seen a great increase in its Assets Under Management in the last few years (i.e. from 10 Lakh crores to 27 lakh crores in the last 6 years). However, the retail participation in direct equities has risen to all-time highs in the past few months and the demat account opening growth rate has raised eyebrows, suggesting that many investors are directly investing in equities that using the Mutual Fund route. Domestic Institutional Investors have pulled out 8800 crores since May 2020. Foreign Institutional Investors have pumped in over 36000 crores since May 2020. The USA and many other markets have seen a flush of liquidity as the yields on debt investments have fallen globally. We have seen huge FDI in Reliance Jio and now Reliance Retail is also eying a similar fundraise; the PE and VC investors are also back in action. This liquidity will continue to provide support to the markets in the near term.
India- China Border issues
There are tensions on India-China border and there are chances of an escalation. An escalation, which we believe are a low probability, can increase the Government spending on defence impacting its budget, and can have a long term inflationary impact. Whatever happens on the border, we believe that the economic actions against China and the steps taken by Government to reduce dependence on China will intensify irrespective. Indian manufacturing will further get a boost from the global sentiments against China and manufacturing decentralisation efforts of large economies like USA, Japan, Korea, UK, and Germany by incentivising the shifting of factories from China to countries including India. $22 billion of FDI in India being announced in the lockdown confirms the trend.
The action of elections in USA is at its peak. Status quo is liked by the markets and any change in the leadership might create short term volatility in the global markets. However, on a long term basis, political parties do not create a major impact on the GDP and these political outcome based volatility will be short term.
Covid cases spike
India has already become the second most affected country in the world and the daily case additions suggest that we might become the most affected country. The mortality rate has been low from the pandemic and the economic activity has gradually started to come back. Some of the businesses will have to restructure; leveraged and low margin business may have to shut down. However, some of the opportunities will always emerge from the changes happening due to pandemic and Government actions. COVID vaccine is much awaited by everyone. There is recent news flow that some of the promising vaccine trials have not been satisfactory. Any successful vaccine launch can turnaround the sentiments.
Moratorium and Restructuring of Loans
Due to the pandemic situation, the economy has been impacted worse than anticipated. Many lost their employment and those lucky enough to retain it didn’t receive salaries during the lockdown period. Hence, keeping the cash crunch in mind, a 6 months moratorium was introduced as an option. Now that the moratorium period is over and EMIs are needed to be paid again, RBI issued a circular talking about restructuring of loans. The people can approach their lenders and ask for their loans to get restructured so that they can sustain a livelihood till situation resolves. The moratorium and loan restructuring was introduced to give the people some liquidity for sustainability. Liquidity has also helped in avoiding further worsening of the economy. However, the question that arises is, are we just delaying the inevitable? Investors should closely follow the developments in this space and reduce allocation to Banks and NBFCs as this space faces the fear of unknown.
The economic activity is slowly getting back, however, many of the impacted sectors like Travel, Public Transport, Hotels will take a longer time to come back to normalcy. Power consumption numbers suggest that the same is back at pre covid levels. In Aug 2020, GST collection was Rs. 87,422 crores vs 98,202 crores in Aug 2019. GDP growth rate for Q1 (lockdown phase) was minus 23pc. However, this was an exceptional number and analysts are discounting FY 20-21 while calculating their valuations, we believe that the on selective basis many sectors are showing promising investment opportunities for near to long term. The continued consumption in FMCG sector, positive number trends in autos and developments from Aatmanirbhar efforts should be closely tracked to make gradual investments.
Curious case of ABB Power Products and updates on QIP
ABB Power Products (NSE: PowerIndia) has come up with an Open Offer which has been triggered due to change of shareholding at parent level between ABB and Hitachi. As per this agreement, Hitachi has acquired 80pc of the ABB’s global promoter shareholding of the power transmission business with an option to buy the balance 20pc post-2023. We advise investors to not tender their shares in this Open Offer as the company has a way higher potential valuation and considering the chances of delisting are very low due to higher institutional holding. ICICI had valued the business at Rs. 8-10k crores in 2018 when this parent level deal was being contemplated. Currently, despite the good performance of the business, the market cap of the company is just above Rs. 3.8k crores. We believe, the share price should rise post the overhang of this Open Offer goes out. The company is into the business of Grid Automation, Grid Integration, High Voltage Products and Transformers. The company will benefit from Electronic Vehicles, Smart City, Metro expansion and railways electrification opportunities in the near term. There are anticipated huge synergy gains from Hitachi and ABB as promoters. As on 31st Mar 2020, the company had an order backlog of Rs. 5192 crores (1.5x FY 20 revenues) and this will further rise as the Power Minister has announced the exclusion of any Chinese power equipments for GOI projects. The company is trading at a steep valuation discount to the listed entities of both the parents (i.e. ABB and Hitachi) in India.