Alpha Ideas

The post below has been written by well known and highly respected Pune investor Jiten Parmar.

 

Many believe Indian markets are expensive. Nifty P/E is 24.

My take on this.

I believe we must consider the following :

1) Equity competes with the following classes for investment – Real Estate, Gold, Debt (FD, bank deposits, debt MF).

Let’s analyze each of this.

Real Estate:

This asset is in a cyclical downturn. Prices have been coming down and I don’t see that changing in the near term. Real Estate as an investment is not at all a paying asset class right now. And I see lower and lower domestic investment inflows in that.

Gold :
Fascination of gold is decreasing by the day among Indians. I definitely see lot less attraction for gold among the young Indians. Gold imports are coming down. And returns are very low, right now.

Debt :
FD rates, return on debt instruments are coming down by the day. 6-7% return barely matches inflation. So in real term you are really not making anything.

This leaves Equity as the only asset class which can give superior returns.

2) Based on above factors, we are seeing record inflows into equity domestically.

More than 5000 Cr per month coming into equities via MF SIPS apart from lumpsum investments.

LIC and other life insurance also invest a sizable amount in equity.

EPFO and NPS equity inflows have also started. These domestic inflows have really helped in stabilizing and supporting the market even in case of FII outflows.

Our dependence on FIIs has definitely come down. I don’t see domestic inflows slowing down, which will keep fueling the equity markets.

3) Fiscal health of government is also much improved. Tax compliance is bound to increase.

Merging of formal and informal economy has been fueled by Demonetization and will further gather pace with impending GST (a game changer reform).

FIIs are looking at India with renewed vigor (Mar 2017 showed record inflows).

With political stability, reform path is clear.

And a sovereign rating upgrade sooner or later is imminent. This can lead to more FII inflows.

4) Economy is bound to improve from here. Earnings are at a low and sooner or later I see them improving. Massive infra push definitely seems like happening. Many initiatives of government will bear fruit sooner or later.

So, in conclusion, I think that Indian markets may remain expensive or in fact become more expensive.

Corrections may come intermittently (and since many have big cash, will be bought into, thus protecting big downfall).

Runway seems clear at least for the next few years as far as equity is concerned.

And the supposedly expensive 24 P/E may be the new normal for sometime to come.