The markets are near all-time highs and investors are fearful, and waiting for a correction. However these fears are unfounded.
Markets seldom go up in a straight line. Corrections are a part of the regular market cycle. But we would not wait for a correction to start investing.
Investors need to understand that the index earnings have grown only at a CAGR of 3 percent in the past four years.
The missing earnings growth is now finally being seen. In the first half, the Index earnings grew 7 percent - we hope to end FY 2018 with an earnings growth of 14 percent.
The earnings growth will make our markets look much cheaper. Besides, in term of market cap to GDP ratio, we are today at 0.95 times as compared to 1.64 times of 2008.
While SIPs remain one of the best ways to invest in capital markets for salaried individuals, businessmen should leverage investing in equities. This is particularly because dividends from equities are tax free up to Rs 10 lakhs per annum and long term capital gains is completely exempt from Income tax.
The Government reforms on demonetization has made all the money come out of the closet and into bank accounts. This is coming into the markets by way of mutual fund and equity SIPs by first time investors.
GST and Tax Compliance
We are not worried about the short term setbacks as India is a credible global story that is unfolding. The structural reform of GST is irreversible by any subsequent government. When fully implemented with the introduction of the E-way bill, the tax compliance will increase and with buoyant tax flows, it would be possible for the Government to spend more or cut taxes in the future.
The linking of Aadhaar with the bank accounts will further plug the loopholes in the system and improve the revenues. We believe that the current market scenario offers huge potential. Consider this – today, only 1.2 percent of our Gross National Disposable income goes into the equities, whereas way back in 1992, 2.3 percent used to flow into equities. With the kind of tax breaks that an investor has today, it could easily double if not triple in the coming few years.Mutual Funds
Besides, the AUM of all the mutual funds in the country is just 13 percent of our GDP. This is way below the US, where it is 102 percent but even worse than a developing country like South Africa, where it is at 34 percent.
A graph indicating the volume of funds pumped into mutual funds vis-a-vis equities. Three times more funds have poured in mutual funds vis-a-vis equities
With the expected GDP growth rate of 7.3 percent next fiscal and a population growth of 1.2 percent, the per capita income would rise. History is replete with examples as to how this changes consumption patterns for the better. As the ratio of dependents fall in our population, the per capita income will grow even higher, increasing the investments in equities even further.
Market volatility indicates that it is very much alive and kicking. After all, Equity is the only asset class that has given 16.4 percent CAGR tax free returns and at the same time, it is extremely liquid. Equity now is the newest entrant into the asset class and holds great potential to build wealth, hence investors should confidently invest.
A comparative analysis between US and India should give an idea of what to expect in sectors such as Finance and automotive.
Metals, Pharma, IT, Cement and Infra are some sectors to watch out for in 2018.
|Dhiraj Relli is the MD and CEO at HDFC Securities.|