In just one-month, Sensex has climbed 3000 points, or jumped straight 8.5%. Till June end, everyone was worried, as market has had a very volatile phase (since last six months). As usual, question is, whether one has missed the bus? or the rally has just started?
Let me highlight on the macro trends:
Crude Oil: 70% of the demand for crude oil comes from transport. Alternative for crude oil is Electronic cars, which will become accessible in another 10-15 years (crude reserves are expected to last 50-80 years). Average crude oil price (for India) should range between USD 55-65, because this price doesn’t affect our foreign reserves.
Interest Rates: India currently stands at a decent inflation rate of 5% as the growth rate is 12%. Thus, the real rate of return is positive. Current economic scenario of increased per capita income, increased demand for consumer goods, increased inflation is beneficial for the equity markets. Inflation going at the level where the real rate of return becomes negative will be harmful for the economy.
Trade Wars: Every news you hear about trade wars is not correct (most of it is media hype). All countries know the adverse impact of increased tariff rates on imports and exports. The current world growth rate is 2.5%. After tariffs, it will become 1.5% which is disastrous. USA and EU have almost settled the trade war.
Indian Political Scenario: Last three terms, two with Congress & current one with BJP, markets have performed reasonably well (5 years each). It is a closely fought war between Modi and others now,where all others are going strong together against Modi (equation may change in next 6 months).But Modi or Congress or even others, won’t stop the growth of the country, only the speed and direction of growth may change. Volatility will persist, but India is a growing Economy.
Corporate Results: This quarter, many companies have profits and even outperformed estimates. Next 2-3 quarters will also be with positive growth expectation. Since this is the year before the election, (every) government strives hard to give high yields this year. Every Company has promised a bumper Diwali this year, plus impact of GST cut on consumer goods.
Recovery of Small & Mid cap: Jan17-Dec17 was a beneficial period for Mid caps. Only the last 6-8 months, the midcaps haven’t rallied. Today mid-cap is available at low or throw away prices. It will again shine is a 2-3 years time horizon. Large Caps are expected to come down in a form of a correction. After Re-categorization, the supply of midcap has increased, and demand has decreased.
Banking sector woes: 30% – Private sector and 70% – PSUs. In the next 7-8 years we will see a shift of market cap from public sector to private sector.