By Sunil Subramaniam , CEO – Sundaram Asset Management Company
Today we stand at an inflection point whereby there is a high probability that the economy and the markets will shift a gear higher in 2018.
The global macros are now more favourable than what they were a few years back. People are reasonably banking on US rate hikes (probably 3-4 hikes next year) and this seems possible given the fact that economy has expanded at a 3.3% pace, which has been the strongest since 2014. The US unemployment rate has fallen to 4.1% which points to the economy being in a very healthy condition. People are also keenly watching Donald Trump’s tax cut plan passing through by end of the year. Japan has also continued its GDP expansion and Europe macros also look good given its latest prints on manufacturing orders growth and robust PMI data. Bank of England also hiked rates for the first time in 10 years, denoting healthy growth in the country. Lastly emerging markets have also turned attractive. All factors are pointing to an increase in global trade in 2018 which should augur well for emerging markets like India.
As regards our domestic economy, we have to be a bit cautious given higher inflation worries and consequently higher interest rates. Back of the mind, crude oil prices are also causing worry edging to a higher range of $60-$65 a barrel. We also have to watch credit demand revival from corporate banks and commencement of lending by the PSU’s post recapitalisation which could signal revival in private capital expenditure. Given that capital expenditure by the Govt. has already been underway over the last couple of years the joining of forces by the private sector would certainly boost infrastructure spending and with it economic growth. On the interest rate front, RBI may be on pause mode till middle of next year unless something drastic happens in either direction. Overall, with the major policy initiatives like demonetisation and GST out of the way, we look set for a higher trajectory in GDP growth and other metrics.
The equity markets would increasingly look at earnings delivery given the fact that valuations are robust based on trailing returns. While structural liquidity continues to provide comfort earnings growth has to happen in order to move the markets to the next leg of the upswing.
We also believe that the recent Gujarat election verdict is a positive as the drop in seats by the ruling party would make it work doubly harder to ensure that it does not suffer even a minimal loss of support from the people. It also indicates that GST and demonetization have largely been taken positively by the people which should ensure minimal dilution of the development mandate.
Within equities there is hunt for value across market capitalisations as well as sectors. We believe that investor should be invested for the long term and be present across the cap curve with a major part of their allocation in mid and small cap space as historically this category has been able to deliver wealth creating returns over the long term as compared to other categories.
We are especially positive on the rural prosperity theme as we believe that the policy initiatives and the increased and focussed spend on rural will spur growth. Similarly the consumption theme is another we are very hopeful about given that the structural change in consumption patterns on the back of increased income is still in its infancy. Also growth in the rural economy would act as a further booster for growth in consumption.
We strongly believe that we are still in the initial stages of a long term bull market which can span 10 to 15 years and so investors should stay invested and keep adding on to their positions through SIPs and STPs.