Why Market is going to be significantly different from what it has been in the past?

Generally, the equity market tends to go down to eventually go up and volatility is common in the equity market. Hence, any investor's success depends on having a well-diversified portfolio. As an individual investor, you must understand how to select an asset allocation that best suits your investment objectives and risk tolerance. By following a methodical strategy, investors can build portfolios that are aligned with their investment plans.

06 Jun 2022
Why Market is going to be significantly different from what it has been in the past?

Against this backdrop, PMS Bazaar conducted a webinar on the topic: “Past ≠ Future”, presented by Mr. Anand Shah, Head PMS and AIF Investments, ICICI Prudential Asset Management Limited. Mr. Anand Shah has more than two decades of rich fund management experience in the Asset Management industry, most recently as CEO of NJ Asset Management. Before this stint, he was Deputy CEO and Head of Investments at BNP Paribas Asset Management Company responsible for investments and overseeing both onshore and offshore mandates sub-advised and sales.

In the webinar, Mr. Anand shared valuable insights on the equity market, the economy in the short and long run, and how to build a resilient portfolio to navigate the volatility of the market. This blog covers the insights shared by him during the webinar session.

Key insights covered in this webinar blog

  • Delta EPS – Driver of the Equity Market
  • Volatility – Remain Invested in a Long Time
  • Where Do We Stand Today?
  • Earning Story of the Last Half Decade
  • Key Structural Reforms

Delta EPS – Driver of the Equity Market

Fundamental factors drive stock prices based on a company's earnings and profitability. Earnings per share (EPS) is the owner's return on investment if they own common stock. You are purchasing a proportional share of a whole future stream of earnings when you buy a stock. That is why the valuation multiple exists: It's the price you're willing to pay for a steady stream of income in the future.

Part of these earnings may be dispersed as dividends, while the rest will be held by the company for reinvestment (on your behalf). The future earnings stream can be thought of as a function of both the existing earnings level and the predicted growth in this earnings base.

Volatility – Remain Invested in a Long Time

Volatility isn't pleasant for most investors. Investor sentiment has plummeted to alarmingly negative levels, so it's no surprise that some are wondering if now is the moment to get out of the market and hold on to their capital until the storm passes. The quick answer is that it hasn't happened yet. In reality, for most long-term investors, now is the time to either stay involved or enter the market. 

A diverse portfolio can assist limit losses in the case of a market slump. Many people believe they can beat the ordinary investor when it comes to market timing. However, it's critical to think about the risks of doing so. Have a deep consideration before you exit the market the next time market volatility makes you second-guess your long-term investment strategy.

Where do we stand today?

With the conflict going on for more than a month and Western countries adopting a barrage of severe sanctions to shut Russia off from the world's financial ecosystems, investors are grappling with yet another wave of uncertainty following COVID-19.

It may not be prudent to liquidate investments in haste if markets continue to be volatile. This is because, while the short-term outlook remains choppy as a result of Russia's invasion of Ukraine, it's important to remember that the stock market has seen all kinds of turbulence in the past, including wars, pandemics, political instability, and has managed to shrug off the effects and eventually bounce back. 

Also, any decision to liquidate any investments in the current environment should take into account other factors such as the asset class's performance, whether any of your goals can be hampered by the current disruptions, or the possibility of being directly impacted – for example, owning a large volume of stocks in a volatile market.

Overdependence on Russian natural gas and crude oil in Europe, as well as reliance on both Russia and Ukraine for critical agricultural commodities, are among the most significant weaknesses. Russia and Ukraine account for more than 25% of global wheat commerce, as well as more than 60% of global sunflower oil and 30% of global barley exports. Because Russia is a significant worldwide fertilizer exporter, any supply shortages or restricted access might have a global impact on output.  However, this may be for six months to one year, but the inflation problem that arises with this will increase, the central bank has increased interest rates and we would witness lower growth. Also, stocks that have significant growth are the ones that are at more risk than the stocks which are not expecting too much growth.

Earning Story of the Last Half Decade

In the period from 2015 even before that when we had short-term challenges in the market, the overall macro was not bad. But if you see today we have significant challenges in terms of earnings growth, that is, a significantly lower or least had a negative earnings growth due to lockdown and the Russia Ukraine war has been impacting the market but the surprising thing is that the earnings growth rate has picked up. 

When looking at the earnings growth, the B2C companies which sell to households were doing very well even during crisis times, and it was the companies that were manufacturing, which were competing with China in some way, and which were supplying goods to these B2C companies that didn't have pricing power.

This is because anything we were manufacturing, China used to dump it cheaper than what manufacturers in India put their cost of manufacturing as, which meant that manufacturing declined in this country for almost 10 to 15 years, and some manufacturers closed their shops and went to China to buy products and sell in here. So everyone became a trader or a b2c company, and we saw less and less manufacturing.

However, after a lot of effort by states and the central government, as well as the business environment that exists today in the world, where the world wants an alternative to China, an alternative to Russia and Ukraine, this has been driving the real profit growth rate for manufacturers, especially in the last two years. We are seeing a remarkably high pace of earnings growth, although B2C companies are doing well, it is at a much slower rate than they were previously. Expectations were much higher, but surprisingly, manufacturing and mining companies are faring far better, which reflects, that in the past, the manufacturing and mining industries that were underperforming are today outperforming even B2C companies.

In the past, there has been major underinvestment in mining and manufacturing. People forgot to invest in manufacturing companies, and several manufacturing companies had to close down because they were not profitable, which was reflected in Bank NPAs. Today all that is changing, and the earnings growth rate for manufacturing companies has increased and investors are looking at investing in these companies.

Key Structural Reforms

The recent structural reforms have had a huge and positive impact on Indian corporates. Buyer trust in the real estate sector was restored thanks to government structural reforms like GST and RERA, as well as increased liquidity in the banking system. While the market has made significant progress in recent years as a result of these reforms, the imposition of the national lockout in mid-2020 will provide a significant challenge for the business. However, with government and RBI backing, the sector and developers were able to recover by the end of 2020. Positive morale pervaded the economy, and GDP showed hints of expansion thanks to a V-shaped recovery. The administration has been implementing a number of steps to help the sector and the economy in general during the previous few months. The industry is now hopeful about future growth.

With the start of 2021, the momentum of historic home sales, fueled by cheap loan rates, decreased stamp duty throughout the festive season, and developer offers seen at the end of 2020, will gain even more traction. The real estate sector will undoubtedly rebound now that vaccine immunization has begun to bring India back to normalcy.

Some of the structural reforms that the government brought in such as in Insolvency and Bankruptcy Code, etc. might have been temporarily overshadowed by external developments such as the pandemic and now the geopolitical conflict. However, once these clouds recede, they will begin to manifest their benefits and advantages in advancing India’s potential growth in decades to come. Also, the decision to implement the sweeping corporate tax reform measures reflects the slowdown in economic growth momentum in recent quarters as well as the need to improve India's international competitiveness as a manufacturing hub.

the Production Linked Incentive (PLI) Schemes were announced across 14 key sectors, to create national manufacturing champions and create 60 lakh new jobs, and additional production of 30 lakh crore during the next 5 years. PLI Scheme will not only encourage foreign companies to find a workforce in the country and thereby generate employment but also encourage domestic and local production to create micro-jobs.

China Plus One, or simply Plus One, is a business strategy for avoiding solely investing in China and instead diversifying into other nations. Western corporations have been investing in China over the past 20 years, attracted by the country's low production costs and large domestic consumer markets. The trade conflict between China and the United States, as well as the COVID-19 outbreak, have highlighted the necessity for businesses to diversify their supply chains beyond China. This has resulted in the "China plus one" strategy, in which multinational corporations expand their operations beyond China. As firms hunt for a new center of production or distribution, certain Asian countries such as India have put up initiatives to attract foreign investment. 

The 'China Plus One Strategy,' aims to make India an alternative investment destination for major global corporations looking to diversify their supply chains away from China. The growing tendency of corporations in major European and American countries to relocate their production bases away from China opens up a window of opportunity for India's trade sector, which must be capitalized on.

Mr. Anand Shah covered all the above-mentioned topics in-depth and also answered some questions from the audience towards the end of the session. He also spoke in detail about their framework for identifying resilient businesses and portfolio strategy. To know all of that watch the recording of this insightful session through the appended link below:

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