Happy Diwali and prosperous new year to all my friends and relatives here:
In today’s newsletter I am attempting to make you all present to the current situation of India outsmarting world and is this situation sustainable and how one can monetise from this.
If we look back at history 80% of the recessions are the result of financial crisis, the very recent one of 2009 was the result of subprime lending and inflated assets, as soon as the asset prices dropped the leverages could not sustain and the money markets rattled. Lehmann default freezed the money markets requiring the US Fed to respond by monetary easing or so called quantitative easing “QE”. This weapon was widely used time and again by various economies as and when required post than example… PIGS crisis (Portuguese, Italy, Greece and Spain) and QE by European central banks. Somewhere in 2017 fed realised that further stimulus was not required as the economies were doing good and as soon as they tried to raise interest rates financial markets tanked and then president Mr trump pressurised to stop any kind of tightening action. What was required to be done rather reverse of that had to be done due to pandemic and a lots of money was thrown to stimulate the economies…… most ended up being unproductive….went into inflating unproductive assets. Pandemic also caused a lot of death resulting into vacancies that still remain unfilled. So on one hand we had inflation and on the other hand red hot employment market which was a signal that inflation was not coming down. Russia-Ukraine war added fire to inflation. Now in spite of knowing that the world economies are highly leveraged and any rate hike would hurt the economies fed had no choice but to raise the interest rates. Most of the developed economies are now faced with the problems of high debt to gdp (mostly greater than 1), slow growth and high inflation.
In the last financial crisis individuals and banks were leveraged and central banks were there to bail them out, but this time it’s central banks themselves in mess and so to that extent it is more dangerous, as any wrong decision and you hurt your T-bills, bonds and currencies recent example being United Kingdom. This part of pain is difficult to figure out and there can be nasty surprises in future. In our opinion innovative…. but some kind of quantitative easing will only be the solution to this …like we recently read ECB and fed are thinking of buying back near term bonds and selling future dated bonds that is they are just rolling the ball in future, or subsidizing energy bills etc.
So what does all this mean for India?
As all of us know money never sleeps it will chase returns and returns are there in developing economies one big diverse economy which can potentially be an alternative to China (we are not even 1/5 th of china) is India. Political stability, good forex reserves, young demography, cheap labour and domestic institutional investment dominated financial markets. are all acting to support for India. All this has kept our valuation expensive and we are at almost 20 times FY 23 earnings expectations of 900 which is fairly priced. If the world slows down India cannot be isolated however the impact can still be low as
1)Our share of exports in GDP is just 11 percent
2)There are strong reasons to believe that we shall continue to benefit from China plus one in long term and Europe plus one in short term.
In the short term what boggles us is the relative outperformance of India vs other economies and at some point they will provide better investment opportunities and we may oscillate in the range resulting in poor returns for our mutual funds investors. Small and mid-cap funds are sitting on lofty valuation and don’t offer a lot of value in our opinion.
So how to monetise from current situation?
These are idle situation for stock pickers and so individual stocks can continue to do good. However we are not in business of giving stock ideas .However debt has started offering good returns in India as well as globally .We think next 3 to 6 mts should be good time to lock your money here especially in FMP’s, long duration funds and Guilt funds for 3 plus years. In our opinion one can expect 7 to 8 percent of post-tax returns from this for next 3 yrs. For Equities we recommend to continue sips and no lump sum however any correction below 17,000 should be good opportunity and equity investment should be increased there, Value SIP (e.g., top up your one sip on any dip below 17000 or 16000.... and stop top ups beyond 17000) kind of concept will work better…rather than chasing returns in our opinion.
HAPPY DIWALI AND HAPPY INVESTMENT
-CA JAYESH GANDHI
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.