Transcript
What Drives Indian Equity Markets G Maran
Unifi Capital
1st Feb 2016
What News Moves Indian Equity Market
FII Fund Flow
US Economy & Markets
Chinese Economy & Markets
Oil Price
Greece or Troubled Europe
Fed Interest Rates & QE
Syria, Global War
Elections & Politics
Reserve Bank & Interest Rates
Inflation
Budget & Tax Rate
Policy Measures & Government
Fiscal Deficit & Current Accounts
SEBI & Corporate Governance
NO, NO, NO, NO, NO, NO, NO, NO, NO
To a man only with a hammer, every problem will look a nail
Then What Moves Market
Investor Return: Is NOT equal to Index Return but that of a collection of Stocks he or she holds.
Is Market only just some index?
Sensex & Nifty
BSE 100 & BSE 500
Bankex & IT Index
Midcap & Smallcap Index
Dow Jones DJIA
S&P 500 & Nasdaq
Hangseng & Shanghai
MSCI Emerging Markets
What moves a stock?
p = e * p / e
price = earnings * PE ratio
shareholder return = earnings growth (PE follows E and not the other way around)
What impacts earnings of a company will eventually impact shareholder returns
Every other interpretation is “Speculation”
Investing is Simple but not easy
What Makes it Difficult? Noise Vs Signal
Long Term Shareholder Return Equals To Company Earnings
Long Term Returns Will Equal Underlying Earnings Dow Jones Returns over 107 Years 8.4 Dow Jones Underlying Earnings 8.3 Berkshire Returns over 48 Years 20.3 Berkshire Earnings 19.9 Sensex Returns over 35 Years 16.8 Sensex Underlying Earnings 15.4 ITC returns over 35 Years 26.8 ITC Earnings 24.6 Sundaram Finance returns in 43 Years 20.6 Sundaram Finance earnings growth 21.8
All returns are CAGR.
Lon
g Te
rm C
orre
latio
n o
f Ec
on
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y, E
arn
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are
Pric
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200
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1,000
1,200
1,400
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Sensex
NominalG
DP
SensexEPS
Myth & Reality In Equities Investing In India Today
Myth & Reality What We Think We Know And What We Actually Know
Myth 1: Falling Chinese Markets will take Indian Equities Down
No.
Chinese Economy
China GDP: $13 Trillion
Exports: 30%
Industrial Products, Apparels, Steel,
Import: 12%
Oil &Minerals, Chemicals, Ores
GDP: Agri: Mfg: Services, 9:41:50
Labour: Agri: Mfg: Services, 34: 30: 36
GDP Growth Rate: 7% to 4%
India $2.5 Trillion
15%
Software, Pharma, Textiles, Jewellery
14%
Crude, Gold, Electronics, Steel
GDP Share 17: 25: 59
Labour Share 51: 24: 25
GDP Growth Rate: 4% to 7%
Chinese Markets
June 14 to June 15: 120% Up
8% GDP growth for 10 Years resulted in a higher Earnings Base
PE @ 24 times, Excluding Banks @ 37 times
Banks have low RoA, high leverage, low provisioning, Value trap
Margin Funding @ 12% of Free float
225 IPOs last year, 223 were upward freeze on the first day
One of which went up freeze for 36 out of first 40 days
Electric Utilities with 12% ROE at 25 PE, $15B in Hangseng, $40B in Shanghai
2 out of top 5 trading stocks were retaill brokerage companies
Myth 2: Quantitative Easing & US Interest Rate Increase will make FIIs to sell and Exit Indian Equities
No.
US Markets
Myth 3: Indian economy & markets are integrated with Global Markets Really?
India Integrated With Global Markets
US & Global Markets
Falling Interest Rates Since ’08
Quantitative Easing
Multi year high in Margins
Sharpest & Longest Rally: 6 years
Physical Assets Lower In 8 years
India
Rising Rates
Tightening of Credit
Multi Year Low of Margins
No rally
Physical Assets Almost Double
Myth 4: Indian Corporate Earnings Have Turned Worse and No sign of Improvement
Earnings Growth
Myth 5: There is no fundamental changes since new Government took over, disappointing. No. Realty?
Inflation Decline:
-5.0
0.0
5.0
10.0
15.0
20.0
Per
cen
t Rural wage growth
CPI
WPI
Indian GDP Growth Rate Debate
Current Reforms
Governance Institutional Macroeconomic policy Sectoral
Decisive reduction in
corruption reflected in;
i.Clean and transparent
auction of coal and
spectrum
ii.Liberalization of gold
import regime, reducing
the rents intrinsic to
quantitative restrictions
i. Unleashing cooperative
and competitive
federalism by adopting
FFC recommendation and
creating Niti Aayog
ii. Close to securing political
agreement to launch
game-changing GST
iii. Pursuing the JAM agenda
in cooking gas
iv. Pursuing financial
inclusion by creating Jan
Dhan accounts
v. Initiating comprehensive
social security via
pension, life insurance
and accident schemes
i. Commitment to
fiscal discipline
ii. Increasing public
investment to
revive growth
iii. Facilitating
declining inflation
via agricultural
policies
i. Liberalizing FDI
in insurance,
defence, and
railways
ii. Deregulating
diesel, petroleum,
and cooking gas
sectors and
adhering to the
commitment to
deregulation
iii. Easing the cost of
doing business
Why Am I Bullish?
Why Am I Bullish
Commodity Decline: Oil, Coal, Metal
Improving Government Finances
Lower Inflation
Lowest Corporate Profit Margins
Minimal Capital Expansion in last few years
Demand growth in future will help sales & margin growth
Earnings growth will be exponentially high
Earnings growth will drive PE expansion
Shift of domestic savings from Physical assets will help PE expansion
What Will Drive Indian Equities in Years to Come Earnings Growth, As always
Earnings Growth
Where are we today? Sensex @ 25K, Investors @ Cross Roads
Market Cycles & Investor Actions
Where Are We Today?
Bull Markets Are
Born In Pessimism
Grow In Skepticism
Mature In Optimism &
Die In Euphoria
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