The recent policy announcements by the Finance Minister are positive and also sustainable. Going forward, there could be a case of government maintaining excess liquidity in the system such that there is faster transmission of rate cuts and that financial system does not come under duress. That apart, few multi-pronged growth strategy measures such as fast tracking infrastructure investments, raising export market share via competitiveness, attracting global value chains that are shifting away from China and prioritising domestic production over imports may be some of the steps implemented in order to revive the growth engine.
The clamour for reduction in goods and services tax (GST) rates and further rate cuts may be helpful in the short-term, but may prove to be a burden in the future. Such was the case during 2009-2013, when fiscal stimulus was provided and could not be tapered later, leading to expansion of the current account and fiscal deficit.
Amidst all these, the Indian equity market has been – and is further likely to remain volatile. This will also be in-sync with the global markets to US-China Trade war fears and yield curve inversion of select developed economies. As a result, a flight to safety was evident across markets with gold emerging as the best performing asset class.
On the domestic front, despite the government’s effort to revive sentiments by way of series of announcements, market performance remained muted due to global and domestic growth concerns. Foreign portfolio investors (FPIs) continued to sell even post the rollback of the surcharge, with August clocking in outflows to the tune of $2.2 billion. However, flow from the domestic institutions (DIIs) remained robust at $2.9 billion, providing some much required support to the market.
We are of the view that continued deterioration in growth is mainly due to cyclical and partly due to structural factors. Cyclical factors include the on-going liquidity issues with the non-bank finance companies (NBFC) and synchronized weaker global growth, spilling into domestic growth via manufacturing and exports. On the structural side, the decline in the investment-to-GDP ratio from 2012 has partly resulted in the growth momentum to slow down.
Ideally, one should invest in times when growth is low and valuations are attractive, which is the current market situation. Similar was the case during 2002-03 when gross domestic product (GDP) growth was at a bottom and valuations were low. However, the equity returns were very high over the following five years.
The best approach to investing in the current market is through the systematic investment plan (SIP) route. Barring a few names, the broader markets, in general have turned attractive. The Nifty Midcap100 P/E ratio has corrected from 25.6x (August 2018) to 14.9x (August 2019) and the mid-cap premium to the Nifty at 13 per cent (August 2018) has turned into a discount of 18% in August 2019. A similar trend is seen in small-caps as well. Owing to the attractive valuations, we have started preferring small-caps and multi-caps over large-caps and recommend investing in small-caps & mid-caps in a staggered manner. Even lump-sum investment can also be considered, albeit with a longer investment horizon (minimum five years and above).
To benefit out of prevailing market volatility, one can consider asset allocation schemes, as these schemes are designed to make the most of the market opportunities present across equity and debt space. That said, investors should not shy away from allocating money to debt mutual funds as well. Currently, the credit / debt space presents an interesting investment opportunity. The risk-reward benefit has turned favourable and it’s a good time to earn the carry with high credit spreads available in the corporate bond space. At a time when the economy is not growing at a scorching pace, utilities and dividend yield stocks are two areas that tend to do well.
S Naren is executive director & chief investment officer at ICICI Prudential AMC. Views are his own