ALSO READAll eyes on Economic Survey as Budget Session of Parliament begins today Budget session begins today, eyes on Economic survey & top 10 developments Economic Survey 2017-18 to be out today: How accurate were past editions? Budget 2018: States may get more farm pricing freedom Why Jaitley should not focus on growth numbers while preparing Budget 2018
With the Sensex and Nifty hitting an all-time high ahead of the Economic Survey today, the first day of the crucial Budget session of Parliament, this author discusses why the markets are set to rise even further. The author believes corrections will be short and the markets will eventually head higher as the earnings jigsaw puzzle falls into place. The Nifty scaled 11000 on Monday, and since then has built its lead further. The Nifty has taken around 126 trading sessions to move from 10K to 11K. This 1,000 point rise has come about amidst rising red flags from the ordinary analyst to those at the helm of banks, mutual funds and brokerages. The Nifty has continued to rise paying scant attention to the red flags and warnings. There are three primary issues being raised 1. The PE is expensive 2. Interest Rates cycle has bottomed out 3. Mutual Funds flow could ebb HDFC Securities believes that markets could further surprise us on the upside. First let’s allay these fears and then move forward. 1. Rising PEs The Nifty at 11,000 quotes at a PE of 26.17 considering the historic March 17 earning of the Nifty of Rs 420. This is expensive. For the last 4 years, there has been a drought of earnings. The Nifty earnings have risen by only 3% CAGR. This drought of earnings is ending this year, when the earnings will grow at a healthy 4% and by 26% in the next year. But the moment you look at the current year earnings of Rs 480, the PE slips to 23 and if you consider March 2019 earnings of Rs 605, it further tumbles to 18. Markets are forward-looking. They will move faster than the earnings. The moment we consider the forward earnings, the markets no longer look expensive. By the metric of market cap to GDP Ratio, we are at 0.97 today as compared to 1.63 in 2008. We are way cheaper. 2. Interest rate cycle has bottomed out Those bearish on the markets say that interest rates cycle has bottomed out.
The rates will rise further from here.While that may be true, the argument that markets will therefore fall is not well founded. Markets both here in India and the U. S. have risen along with rising interest rates in the past. What matters is earnings growth. In India, Interest rates rose from 4.5% in August 2003 to 7.75% in January 2008. Our Nifty rose from 1271 to 6357, up 400%. In the U. S., the interest rates grew from 1% in June 2003 to 5.25% in June 2006. The Dow rose from 7397 in March 2003 to 14,198 in October 2007, a rise of 92%. If earnings growth happens, interest rates are taken care of. Besides a rate increase means the economy is healthy to absorb the higher cost. 3. Funds Flow will Mutual ebb We do not subscribe to the view that mutual funds flow will ebb. The total assets under management were 13% of GDP in the year 2016-17. This was lower than the world average of 53% and even lower than South Africa, a developing economy like ours, where it was 34%. Considering the fact that dividends are tax-free and sops for the long-term investments will continue, the equity markets are much attractive and liquid than the real estate and the FDs. There is no alternative. This TINA factor will continue to push investors into the equity and the MFs. With just 1.2% of the Gross National Disposal Income going into equities nd debentures, there is a long way India has to go. Even in Harshad Mehta’s time, this was 2.3%. Just look at the potential, as to where can go as the allocation to equities rises over 5% in the coming decade. It’s a growing world The IMF in a curtain raiser at Davos has upped the global growth by 0.2%. The Bank of America has just raised its target of S&P 500 by 10% within a month of its last upgrade. The green shoots are being seen in industrial production and economy. Once the courts decide on Aadhaar's compulsory usage, it will improve surveillance and tax collections, as every account, investments, mutual funds and insurance policies will get covered. As the E-way bill is made compulsory the GST revenues will rise as the compliance rises. This incremental tax flows will be the next trigger for the markets to go higher. The government has made some deft moves like cutting its borrowing programme and keeping fiscal deficit largely in control. The redeeming feature of the deficit is that this due to a shortage in revenue rather than extra expenditure by the Government. The joker in the pack will be the Government decision to prepone the general elections to November 2018, which will be seen as helping the ruling NDA to fare well at the hustings. While no market has ever gone up on a straight line, we believe the corrections will be short and the markets will eventually head higher as the earnings jigsaw puzzle falls into place. V K Sharma is Head – PCG & Capital Market Strategy, HDFC securities