If You Want To Be In Equities, Be Positive: Sunil Singhania

If you just see the evolution of the Indian economy and the Indian equity market, we got our Independence in 1947, and it took us almost 60 years to hit the first trillion. So, in 2007 we hit trillion dollars as far as the economy is concerned. The next trillion took us only 7-8 years. So by 2015 we were a $2-trillion economy.

The market doesn’t necessarily mimic GDP on a month-on-month or year-on-year basis but there is a correlation. Therefore, when we track global markets, we always see market capitalisation-to-GDP as a useful ratio. Having said that, obviously, there has been some stress in the economy. There are some challenges. Some are natural and some are because of the forward-looking reforms which we have seen over the last couple of years, whether it is demonetisation or a move towards an organised economy or the Goods and Services Tax. In the near term, these challenges will definitely be there. But the impact of all these challenges would be stimulus enough for the economy to come back to 7.5 -8 percent growth rate. These are reforms where the implication is from a much longer-term structural perspective. Our view is, we should be hitting 7.5-8 percent GDP growth rather soon.

I don’t know what the government is going to do as far as the elections are concerned. But this government has shown a resolve that they are open and have the courage to do things which might not look populist. So, if elections were on their mind, they wouldn’t have done demonetisation just before the Uttar Pradesh election. So we have to bifurcate or demarcate the two. We are a democracy and everywhere in the world we will see a few populist measures. But, I don’t think it is going to be at the cost of the economy.

Risk will always be there and that is the DNA of the market. There is never going to be a scenario where there is no risk. For the last 4-5 years, global markets have held up. When we look at India in isolation in the last one year, all global markets have done very well and India has participated. In fact, the flows recently were much more buoyant in global markets than in the Indian market. As long as liquidity is available in plenty, we don’t see any problems as far as the news flow from international markets is concerned. Geopolitical concerns like North Korea will always remain. But we don’t see major concerns as we did in 2007-08 where everything was in a bubble.

You get mixed signals. You can say consumer confidence is lower but what explains record sales of two-wheelers and four-wheelers? It’s not that companies are buying but consumers are buying. What depicts record TV sales, air conditioning sales and electronics sales. Malls are full, we are seeing good demand there. Consumer-facing non-banking financial companies are showing good growth. So the signals are mixed. Sometimes the data points can also be misleading because GST caused a few manufacturers to prepone their manufacturing or some consumers to prepone their purchasing under the fear that the prices could go up a little bit. These are not normal times. So, let us wait for 3-4 months when this impact of GST stabilises and then we will come to know the true picture.

Commodities by their very nature tend to be volatile. That’s why they enjoy a lower multiple as far as the valuations are concerned. Typically, investors get swayed by record profits and enter commodities and commodity stocks at the wrong time. We need to be clear that these are not structural but cyclical businesses and will always have their ups and downs. If you want to buy from a longer-term perspective, then you have to focus on the company with the lowest cost of production as they will be the last man standing in case prices have moved up.

Our view is that there are opportunities across the board. But a good sector or a good stock is not necessarily the best outlook. It also depends on the price. For example, we are positive on financials but we feel that the lending business is not too expensive.

Red flags will keep on coming. It’s very tough. For commodities, right now it looks good but we never know, their prices may go down because it depends on what China is doing. So for those kinds of sectors, you need to be careful at what valuations you come in. Similarly, there are still some banks which have stress. So we worry for smaller public sector banks because they don’t have the capital and they are losing market share. I think over a period of time they will just become redundant.

I said that we are surely going to be from $2 trillion to $4trillion, that is the wealth it will be created. If you buy today, there is a possibility you might see the investment down by 5-7 percent. But it doesn’t matter. Our advice to investors is that if you are an equity investor then you have to be positive. You can’t be an equity investor and be negative. If you want to be in equity then be positive. If you are not positive for your economy and your country then you should avoid equity completely.

I read a book called ‘Freakonomics’. It was a discussion on why crime rates in the U.S. fell in the 1990s. A lot of economists gave their perspective and they found abortion was legalised in the 1970s. So there were no unwanted 20-year-olds in 1990 who would normally drive up crime rates.

There are different things you see in the balance sheet. Maybe you try and master one before you move on. First thing you could focus on is cash flows. A company might show a Rs 100 crore profit but if there are no cash flows, then it is of no use. Just try and see whether the quality of earnings is reflected in the cash flows. Try to master the cash flow analysis and then you could go to operating leverage and other things.