India, A long term Play

These days, it has become very easy to draw an analogy between Indian stock performances and the general state of the country. In the not so distant past, India was regarded as the sick man of Asia, with a proclivity for higher inflation, de-growth and corruption at every nook and corner – while foreign investors fled India.

Something needed to be shaken up.

This is exactly what happened with the arrival of a stable government which saw a boost in business and investor confidence.

Since start of the year the Sensex has delivered 24.0%. Most of the 30 blue chip companies are in positive territory with Hidalco Industries and Axis Bank leading the pack with gains of 57.0% and 50.0%, respectively. The rally is also handsomely evident in Small and Mid-cap indices with gains of over 50% and 30% respectively. Valuation of these small players is reasonable as it provides room for further upside. The Price/Book (P/B) valuation discount of Small and Mid-Cap indices remain near long term historical averages. On a relative basis, Indian indices have been the best performing markets since start of the year. (Chart below).

That said and despite some encouraging economic numbers (growth in car sales and increase in demand for cement), headwinds remain. The deficit rainfall remains a key macro risk thus impacting the overall GDP growth which still remains below the 5% mark. Indian rupee is also showing some signs of weakness lately but mainly driven by strong US GDP numbers and month end dollar demand from importers. The overtones and undertones of the last Indian budget may lack immediate vigour to uplift the economy, however it has the impetus of long term-oriented approach. A classic example is the revival of investments in urban infrastructure.

You go anywhere in the world, the basic objective for policy makers is to know how to drive the economic car. The economic car can be a Maruti or a BMW! The essentials remain in knowing how to drive the car. In the same breath, any government objective is to build a strong economy and a fair society, where there is opportunity and security for all. “Less government, more governance” is a brilliant demonstration of the importance of deep and long term reforms.

The triumph of Germany in the last world cup is not by chance. The fundamental revolution in training with programs that identified and propelled promising young talents started back in 2004. In other words, it was a long-term strategy.

India needs such an approach – one that includes microeconomic adjustments and programs that encourage mobility, market flexibility and innovation, laying down the foundation for long term prosperity.

India faces a sustained risk-on. Conditions that led the market to spike this year still hold true. Indian markets are poised to gravitate to new heights from here, with adjustment every now and then. In the current scenario, it is advisable to stick to investing in quality stocks having strong fundamentals and financials.