It is redeeming to see that the Nifty and the Sensex are
cruising at record highs, something we predicted quite early in July 2018. The
new highs have come about on the back of sustained inflows into mutual funds.This
asset class has replaced FIIs as the prime movers of the markets. MF SIPs are
handy to absorb the selling pressure by FIIs, who have been net sellers in this
calendar year.It is interesting to see retail investors displaying maturity by
continuing with their SIPs despite the turmoil in mid and small-cap stocks. With
the assets under management (AUM) of MFs being less than 12 percent of our GDP,
there is ample room for them to increase. A developing economy like South
Africa has an AUM to GDP ratio of 54 percent.
Here are some reasons for why Indian
markets are at record highs:
Financialisation of savings:
Technology has
enabled the banking and financial services sectors to penetrate rural areas,
and the trend of moving from physical assets to digital/financial assets is
fast catching on.
This should
channelise more savings into equities, as the percentage of money going into
this asset class rises from the current 1.2 percent of the Gross National
Disposable Income.
Earnings catching up:
Earnings are
also catching up fast. The Nifty earnings, which grew at a CAGR of 3 percent
between 2013 and 2017, increased by 8.5 percent in FY18, and this year, the
growth is likely to be in high teens. This should make valuations look
comfortable.
Crude Oil:
Crude oil
has fallen 8 percent from its recent high of $ 80 a barrel. This augurs
well for our economy. The rupee remains a concern but is likely to be tethered
if crude continues to behave.
Mid-cap and small-cap recovery:
The mid-cap and
small-cap space has borne the brunt of re-categorization of MF schemes,
additional surveillance measures, and stretched valuations in recent times.
With the improvement in earnings, we believe select mid-caps and small-caps are
on track for decent recovery in the next 12 months.
Political Jitters:
Political
jitters have also reduced after the no-confidence motion against the government
fell through earlier this month.
What is the way ahead?
Investors should
remain in large-cap stocks with low or no debt, cash flow-positive companies,
or invest through SIPs in ETFs or select MFs.
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