In India, Government’s intention to correct the economic situation with a cut in taxation and stimulus is very positive for long-term wealth reaction in equity. And the Government’s plan to provide further fiscal stimulus in the future as per the need of the economy is lifting the sentiment of the market. Risk taking ability for domestic equity market is improving with optimism that economy will recover led by stimulus, festive demand, good monsoon and lower interest rate.
Q2 result for banking sector has been marginally better than expected due to base effect, reduction in provisioning and positive vibes over NPA resolution. The outlook for the future has improved led by increase in liquidity and cut in operational cost. The negativity is that slippage is still happening with stock specific issues. But given attractive valuation, banking sector will do well and outperform the market in the future. Seems that a majority portion of negative factors are largely digested in the domestic market today.
Equity market usually advances before the start of an economic growth. The transitory lag between equity market and economy could be in a range of 3 to 12 months depending on the economic cycle. The private sector is not investing today since the capacity utilisation is at a decade’s low. For India, the economic problem is a mix of structural and cyclical issue. Economy was slowing down in the last two years due to cyclical problem which got extended due to structural issues. Structural problems are being resolved today by initiating reforms. The biggest concern is the weak financial position of the banking sector led by NPA problem which is at the peak level and the market is hoping that it will vanish in the coming quarters led by reforms and faster resolution by IBC (Insolvency and Bankruptcy Code).
Reduction in interest and tax rates are very positive for equity and during such periods they outperform other assets like Bonds, Commodity, Gold and Currency. Equity usually starts to do well when interest rate reaches near the bottom of the cycle. In India, repo rate is at 9 year low of 5.15% and RBI is likely to continue its reducing stance in the medium-term. Globally, interest rate in Euro area has been zero for a long time but economy did not improve while in the US it is just coming down from the 10 year peak as economy started to slowdown. In a nutshell, we have mixed trend of sharp reduction in India, an early reduction in the US and Europe at the lowest slope. However, India has an advantage with its reducing interest rate, tax reforms and likely reversal in economy from the second part of the year, to do well in equity.
Posted: October, 2019.