Chandigarh, December 14:
By :RR Chinku
The markets are near all-time highs and investors are fearful and
waiting for a correction. However, these fears are unfounded. The
Sensex, which began with a base value of 100 is now 32,228, giving a
compound annual growth rate (CAGR) return of 16.4 per cent, since the
inception. Had you not invested in 1986 when the Sensex value was 549,
thinking that it is more than five times the base value, how would you
have seen 4545 in 1992 or 6,151 in 2000 or 21,207 in 2008 or 32,228
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 three per cent in the past four years. The
missing earnings growth is now finally being seen. In the first half,
the Index earnings grew 7 per cent, we hope to end FY 2018 with an
earnings growth of 14 per cent. The earnings growth will make our
markets look much cheaper. Besides, in term of market cap to gross
domestic product (GDP) ratio, we are today at 0.95 times as compared
to 1.64 times of 2008.
A salaried class person should consistently invest via SIPs while a
business man should have the discipline of regular investing apart
from an occasional lump sum investment when it is feasible. A
businessman has an additional reason to invest in equities–to
diversify his business risk. While investing in the shares of Tata
Motors you are becoming a part owner of the company. You will gain
from dividends and capital appreciation, while leaving all the hassles
of managing the show to the Tata’s. Investors should appreciate the
fact that dividends are tax free up to Rs 10 lakhs per annum and long
term capital gains completely exempt from Income Tax.
The government reforms on demonetisation 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.
We are also 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 per cent of our gross national disposable income goes into
the equities, whereas way back in 1992, 2.3 per cent 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.
Besides, the assets under management (AUM) of all the mutual funds in
the country is just 13 per cent of our GDP. This is way below the US
where it is 102 per cent but even worse than a developing country like
South Africa, where it is at 34 per cent. With the expected GDP growth
rate of 7.3 per cent next fiscal and a population growth of 1.2 per
cent, 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. On the chances of interest rates rising in the US, a
rate hike at the 13th December meeting is baked into the prices. Both
here in India and the US, the markets have risen along with rising
interest rates in the past. Market volatility indicates that it is
very much alive and kicking. It is a trader’s friend and an investor
has a weapon in his armoury called SIP through which he can tame it.
Equity investing will provide a good opportunity to create wealth as
compared to the standard norms available for investing. After all,
equity is the only asset class that has given 16.4 per cent CAGR tax
free returns and at the same time, it is extremely liquid.
(The writer is an independent commentator on socio-economic and
political issues. Views are his personal)