“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham
India woke up this morning to a 6% fall in US equity indices. This was on the back of a 2.5% shave-off last Friday. Indian equity markets too have bore the brunt of this correction in global markets. Mood seems to have suddenly turned bearish, almost opposite of what it was barely a month back. Fear seems to have replaced greed. Obituary of midcaps/small-caps is already being written.
In this context, it is pertinent to revisit the drivers of equity markets in the long-term. This does not imply that there would not be volatility in the near-term. Not going too far into history, equity indices have corrected 10-15% several times in this decade alone, though every time the reasons ascribed to for the same are different.
Interestingly, rarely have these reasons (fears) turned out to be entirely true and markets resume the upward trajectory. In the process, the weak-hearted succumb to short-term volatility while the strong-minded with deep conviction embrace corrections as a long-term opportunity.
We do not believe that a 75 bps spike in 10-year gsec yields in India is adequate enough for investors to stop investing in equities. Of late, most of the capital allocation to Indian equities in the last few years has come to mutual funds (MFs) in the form of systematic investment plans (SIPs). This is unlikely to change and if at all, it might even accelerate further due to the onset of the mega trend of
financialisation of Indian savings.
Growth seems to have bottomed out for India and is likely to pick up in the coming years. More importantly, corporate earnings in the quarter gone by have been better and are likely to be the start of a sustainable trend due to (1) buoyancy in global growth (2) revival of investment cycle in India (3) expected recovery in India’s rural economy. We believe this bodes well for Indian equity markets in the medium/long-term.
We believe the recent correction in prices has once again created an opportunity to invest in quality companies. Debate around large-cap or mid-cap is futile. What is worthwhile is to be focused on quality defined as companies with strong management teams, healthy balance sheet and a value-accretive business model. This is the core of our investment philosophy.
Let us not ration rationale – spray it in abundance!
Nilesh Shah is the Founder & CEO at Envision Capital