Since the last time I wrote in ET Markets, the biggest macro headwind for India has now taken a few steps back. Oil prices are down from its recent highs and keep going down, bringing down the USD-INR down along with it. The macro analysts continue to fret about the impending state elections, general elections next year, US-China trade war and very recently the US market fall. Somehow, I have always seen that there is something or the other to worry about in the global economy. But as the world has seen, companies have survived and thrived over the last century despite two world wars and countless natural and man-made calamities. The challenge is that everyone wants to get rich in a short period of time. No one has the patience and mental fortitude required to hold on to good businesses over their business cycle. Business results, in general, tend to be mean-reverting, which means over time, great results become mediocre and poor results get better.
Now that quarterly results have mostly come in, they indicate a total revenue growth of 20% on aggregate and around 78% of companies have a positive or flat growth. The results of the universe of stocks I track have been improving in the last two quarters and although everything is not hunky-dory as yet, things are not drastically bad as well. Valuations, however, are still on the higher side. Good businesses with long-term earnings visibility continue to be expensive.
Domestic mutual funds continue to see strong inflows. The share of equity-oriented schemes is now 41.2% of the industry assets in October 2018, up from 38% in October 2017. Equity and equity-linked schemes attracted Rs 12,622 crores, besides, Rs 55,296 crore was invested in balanced funds in October. Inflows into SIP funds were at 7,900 crores, up 42% from last year. A sustained inflow of retail capital into the India markets and especially through mutual funds is a good indication of retail participation. This trend is unlikely to wane in the near future as more and more retail investors get used to their monthly SIPs. I see a lot of similarity between India of today and the early 1980s in the US when the retail investment boom was fueled by the 401(k) plan. The 401(k) in my opinion was one of the main catalysts of the biggest 20-year boom in US markets till 2000 dot-com bust.
An investor makes money essentially by earnings growth and PE expansion. The case for PE expansion in India as of now seems limited as we are already above the average historical PE. Incremental returns in the near future are more likely to come from earnings growth, so as active investors we need to focus on those businesses which are able to generate above-average earnings growth. Some sectors such as Chemicals, Hotels, Paper, IT, Optical Fibre and Cables seem to be doing well and should be kept on our watchlist for deeper study.
This article first appeared in Economic Times ET Market Moghuls section on 22-Nov-2018.
