Equity: Investors’ darling

Equities: To buy or not to buy? This is perhaps the thought that is crossing the investors’ mind. It’s been quite a journey for Indian equities from being an outright sell during the currency crisis of July-September 2013 to becoming a darling of investors.

What has changed? Well, we have an RBI Governor who is undisputedly one of the best to handle the global crisis and its impact on the Indian currency. As the US taper announcement rattled the markets, the rupee was pressured on the back of a high current account deficit. This was forcing investors to gravitate towards real estate and gold, putting more pressure on the current account.

Regaining confidence The announcement of the FCNR swap scheme brought in the much-needed dollars and gave confidence to markets that the right steps were being taken. Further, interest rates and some of the emergency measures were being reversed as the situation stabilised. However, the RBI Governor continued his hawkish stance and vowed to bring down inflation that has been the bugbear of the Indian economy over the last few years. The weak currency has helped exports; imports have also come down, resulting in a better trade deficit number.

However, the single biggest positive factor is turnaround in corporate earnings. Contrary to expectations, the Sensex earnings have grown 14-15 per cent over the last two quarters. Growth has been primarily driven by the exporters and the global businesses of Indian companies, aided by private banks. However, there are signs of bottoming out in the cyclical sectors. We have begun to see more earnings upgrades — the first sign of recovery.

Earnings looking up Now, finally, let’s answer the most-commonly asked question: Are we too late to enter this market at an all-time high? We often tend to judge the attractiveness of markets with the absolute Sensex or Nifty value, which is actually irrelevant. We have seen the market testing the level of 21,000 at least six times in the last six years before finally breaking out. However, each time the market scaled this level, it turned progressively cheaper. This is because earnings have grown by approximately 55 per cent , which makes the market 35 per cent cheaper today compared to its earlier record high.

We are currently trading at a multiple of 16.5x with Sensex at 22,000; in 2008, it was 25 times. The simple point is that markets are reasonably valued; ROEs have bottomed out; earnings are looking up and a stable new Government is expected at the Centre. It is difficult to estimate the magnitude of the rise; however, the market is headed up and investors must allocate towards equities now or stagger their entry in case they are worried about the absolute rise over the last month. It is inevitable that the equity markets will do well over the next few years as equity prices are ultimately slaves of earnings.

The writer is Ashish Shanker, Head, Investment Advisory of Motilal Oswal Private Wealth Management.