Could the equity markets be poised for an upside break-out?
A recent research report equated the current market situation with the equity market situation that existed back in 2003. Back then, the markets were coming out of a 2 year slowdown but the ingredients of growth were there. That phase actually laid the foundation of the multi-year bull market in India.
On quick glance, there are three similarities between 2015 and 2003. Firstly, like in 2003, Indian companies are operating at record low capacity utilization. Secondly, after years of corporate profits growing at sub-10%, the profit growth is likely to double. Lastly, there seems to be a reformist tilt in government policy towards making India globally competitive.
The big commodity advantage…
With oil prices at below $50 / bbl and most industrial commodity prices at multi-year lows, India has a lot to gain. Being a net consumer and net importer of commodities, India stands to benefit immensely from a prolonged slump in commodities. Secondly, unlike a lot of other emerging markets, India is not too vulnerable to the economic machinations of China. But most importantly, low commodity prices will keep inflation low which will spur the RBI to maintain a dovish monetary stance. These factors will go a long way in giving India a valuation advantage over other global economies. And cheap commodities appear set to stay!
Growth and re-rating…
The first big trigger in favor of India will be growth. India is likely to grow at 8% over the next 3 years even as China falters to below 6.8%. With most other emerging markets being dependent on oil and other commodities, they would not pose serious competition to India unless the commodity super-cycle starts again. That surely looks unlikely!
During the 2003 to 2008 period, net profits grew at a CAGR of 21% but fell to 8% in the 2008 to 2014 period. This growth is likely to get back to 19% over the next 3 years with huge implications for profits and valuations.
IPO market seems to be at a cusp…
The biggest lead indicator for any sustained rally in markets has been the IPO market. We have already seen IPO collections exceeding $1 billion this year, far higher than the combined funds raised during the last few years. There is a symbiotic relationship between the primary and secondary markets as we saw in 2007 and again in 2010.
The big takeaway is the return of the retail investor; both in the IPO market and in equity mutual funds. Historically, multi-year bull markets in India have always been triggered off by IPO markets. It may be ripe for a break-out. In the process, a massive re-rating of India Inc may be about to begin. ©
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