Of late, despite a record mandate for the ruling government, relatively benign macros, low oil prices, reasonably good monsoon, falling interest rates, low inflation, fiscal prudence by the government and many such favourable factors, the sentiment remains poor. In terms of year-to-date performance of the top 50 equity markets in the world, we are now ranked 43rd. If someone had told us about these favourable factors six months ago, the markets would have rallied and gone on to touch much higher levels.
Instead the indices are more than 10% lower than their highs with the small and mid cap indices trading at historic low valuation levels, after correcting more than 44 % and 28% respectively from their highs. Certain sectors like Auto, Metals, Media etc have also corrected more than 20% in the current year.
The pain doesn’t seem to ending here and further corrections seem to be in store. After a long weekend and with Sensex heavyweight, Reliance having gained more than 10% in a single day, the Sensex still corrected by 600 points on Tuesday, 13th August. There is a sense of despondency in the market as both consumption demand and investment are failing to pick up.
There is pessimism and the R word, “Recession” is increasingly being used. In the world debt Market, currently more than $15 Trillion worth of Bonds are trading at negative yields, with bond yields for Greece which till recently was a terminal case, having also declined to below equivalent US treasuries. This indicates the broader pessimism with respect to the future world economic growth and expected low inflation rates. FPI’s are on a selling spree, Gold prices are up 20% this year and may break its all time high of $1921 registered in 2011. There is a general monetary policy impotence, wherein despite repetitive rate cuts, they are not being passed on to the borrower. There is a general risk aversion in the market with the lender not wanting to lend and the borrower not inclined to borrow and to invest. At the micro level, the animal spirits seem to be missing, no one is talking growth, no one is thinking new projects, no new capacity addition is taking place whether in MSME or the “Organised” sector. Everybody talks about deleveraging, about hoarding liquidity, everyone wants a low profile and seems scared about the government’s next move that will disrupt the existing business environment. Government PSUs or PSBs are too scared of the enforcement agencies and openly advocate, “take relief from the Court” policy so that they are not held responsible for the outcomes. The enforcement agencies seem to be going overboard, like a kid who has got a new toy, the government agencies are using their newfound tool, “Data Analytics” for extreme usage. An associate recently shared that his company has received a notice/query from the Income tax office regarding lesser amount of TDS deposited on account of Staff Salary. To explain that some employees had left, the company will have to go through the exercise, engage an Income tax consultant and end up spending more money than the TDS that had not to be deposited. This is definitely not helping the sentiment. The death of CCD Founder, V G Sidhartha due to pressures of High Debt and tax authorities, has further aggravated the poor sentiment situation. The highlighting of Debt default by high profile Businesspersons like Vijay Mallya, Naresh Goyal, Zee, ADAG, DHFL, and many others has made the business community risk averse. Business confidence gets even more shaken when newly elected state governments attempt to renegotiate or rescind signed contracts. As far as the equity market is concerned, the main reason for Market Sentiment being so poor is the lack of corporate earnings growth. This has been the single-biggest disappointment in Indian equities market over the last few years. In 2008, the share of corporate profits/GDP in India and the US was basically the same at about 7 per cent. Today, these ratios are near 10 per cent in the US and just over 2 per cent in India. There has been a collapse in corporate profitability in India. There are various reasons for this earnings de-acceleration; The corporate bank NPA clean up, higher corporate taxes, technological disruptions, change in business models, lack of private investment due to low levels of capacity utilisation, risk aversion, an overvalued rupee, low Export growth of only 3.3% in Apr-Jul 19, low import growth etc. Corporate Earnings have also de-grown because of Heavy provisioning by Banks to account for NPA’s, Disruptions in industries like Telecom, Media, etc., the impact of E commerce and rise of GVA model as against PAT model for corporate valuations and finally low level of capacity utilisation impacting the economies of scale. Equity market movements have a direct relation with market sentiment. Out of the four legs of the market; Corporate earnings, Macros, Sentiment and Liquidity; Sentiment plays a vital role in stock valuations and volatility. Many scholars have explored the relationship between investor sentiment and the stock returns. Research has time and again proved that excess returns are positively correlated with shifts in sentiment, and the magnitude of bullish (bearish) changes in sentiment leads to downward (upward) revisions in volatility and higher (lower) future excess returns. Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market.
Market sentiment, as the name suggests, describes the outlook of investors in a market. Market sentiment is most evident in overall price trends. For example, rising prices suggests an optimistic or Bullish market sentiment, and falling prices suggests a poor or Bearish market sentiment. Stock prices go up due to increase in Earnings or due to change in valuation. This change in valuation is governed by the sentiment. When all seems to be good, you will be Bullish and be willing to pay a higher valuation or multiple for the purchase of an equity or asset and vice versa. As a result, market prices are not necessarily indicative of a stock’s fundamental value. Hence sentiment plays a major role in the stock price movement. Most investors will now only increase equity allocations once earnings are delivered. On current earnings, the markets are simply too expensive and don’t deserve the valuations and premium they are trading at. However, when sentiments are low, expectations are also low; hence any marginal improvement in results will also lead to a spike in stock prices. Hence low sentiment at times also works as a trigger for a resumption of market Bull Run. Another major reason for poor sentiment is the focus on negativity across the board. If the country is growing at 6%, which is one of the fastest growth rates in the world, I am sure there is something good which is also happening. Yes, we are growing at far lower than our potential, given our demographic dividend, the benign macros, improved infrastructure, political stability, fiscal prudence and many such factors. Out of the “Four Legs” of the market mentioned above; Macros are benign, be it Oil prices, monsoons, interest rates etc., all seem favourable. Even the Headwinds of world trade wars offer a great opportunity to India. Next comes Liquidity; reports suggest that there is daily excess liquidity to the extent of Rs 1 Trillion, however this is not translating into lower interest rates and credit flow to businesses due to risk aversion, which needs to be addressed.
Corporate Earnings can only improve with a boost to investment and consumption.
Good monsoon, credit flow to NBFCs, rationalizing of GST rates, increase in Festive demand will go a long way in boosting consumption demand. The government will have to take the initiative in investment. Many economists suggest some Fiscal profligacy and even higher inflation to boost demand and economic growth. Availability of capital in a negative yield scenario should not be an issue for a stable government, which has shown financial discipline. Low hanging fruits like stalled projects need to be kick started. Policy intervention wherever required needs to be done. Namo 2.0 has taken on the challenge of delivering a $ 5 Trillion economy in the next 5 years. What the, investors, businesses and markets want is the roadmap for the same. The objective is noble and achievable, but what we want to know is the route the government intends to follow because it has been giving conflicting signals to investors. It is inviting Capital on one hand and levying a higher tax on profits, going against its promise of bringing corporate taxes at par with South Asian and other similar economies. The government to its credit has tried to lower interest rates in the economy. This will help, but in addition to easing monetary policy, investors would like to see a concerted attempt to implement the next generation reforms in land, labour and judiciary, and make India an easier place to do business. The street is also worried about the “left of Centre” leanings of the government. It appreciates the requirement of providing basic needs to a vast underprivileged populace but the street will prefer a top down or trickle down effect rather than a bottom up strategy currently being followed by the government. This is mainly due to the misguided allocation of already scarce capital to loss making PSUs and non-economic and unviable infrastructure. The government has no business to be in business due to its low productivity, inefficient use of capital, corruption, political intervention, low adaptability to change and many such factors.
The government should enable businesses and the best way it can do this is by letting business do its business. It should start by reducing its borrowings so that businesses can borrow at lower rates, it should provide policy and tax stability so that the businesses can plan and account for the same in their viability calculation, It should give businesses flexibility in labour and land laws and provide an even playing field to all and make enforcement less coercive and more cooperative by a change in mindset. Not all businesses are thieves, they don’t take risks to be labeled a failure and be prosecuted. Don’t make failure a taboo in society or risk premium so high that businesses don’t remain viable. If risk premiums rise, the equity markets have to be cheap enough to deliver the higher expected pre-tax returns.
To improve the sentiment, for a start, there has to be a better articulation of the government’s economic philosophy, priorities and game plan for the next five years. We need to see a concerted attempt to make India an easier place to do business, be it taxes, regulations; the next generation of reforms, consistent policy framework and whatever else it may take. There are many negatives and some positives but hope always trumps despair. History is with us and we shall overcome this cycle too, but this time the stimulus and push will have to be provided by the government. Happy Investing!Happy Investing!Stay Blessed ForeverSandeep SahniNote: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep is alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. (Hons.) Class of 1985.)
Sandeep’s investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.
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He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation.
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