What Drives Indian Equity Markets G Maran

Unifi Capital

1st Feb 2016

What News Moves Indian Equity Market

FII Fund Flow

US Economy & Markets

Chinese Economy & Markets

Oil Price

Greece or Troubled Europe

Fed Interest Rates & QE

Syria, Global War

Elections & Politics

Reserve Bank & Interest Rates

Inflation

Budget & Tax Rate

Policy Measures & Government

Fiscal Deficit & Current Accounts

SEBI & Corporate Governance

NO, NO, NO, NO, NO, NO, NO, NO, NO

To a man only with a hammer, every problem will look a nail

Then What Moves Market

Investor Return: Is NOT equal to Index Return but that of a collection of Stocks he or she holds.

Is Market only just some index?

Sensex & Nifty

BSE 100 & BSE 500

Bankex & IT Index

Midcap & Smallcap Index

Dow Jones DJIA

S&P 500 & Nasdaq

Hangseng & Shanghai

MSCI Emerging Markets

What moves a stock?

p = e * p / e

price = earnings * PE ratio

shareholder return = earnings growth (PE follows E and not the other way around)

What impacts earnings of a company will eventually impact shareholder returns

Every other interpretation is “Speculation”

Investing is Simple but not easy

What Makes it Difficult? Noise Vs Signal

Long Term Shareholder Return Equals To Company Earnings

Long Term Returns Will Equal Underlying Earnings Dow Jones Returns over 107 Years 8.4 Dow Jones Underlying Earnings 8.3 Berkshire Returns over 48 Years 20.3 Berkshire Earnings 19.9 Sensex Returns over 35 Years 16.8 Sensex Underlying Earnings 15.4 ITC returns over 35 Years 26.8 ITC Earnings 24.6 Sundaram Finance returns in 43 Years 20.6 Sundaram Finance earnings growth 21.8

All returns are CAGR.

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Sensex

NominalG

DP

SensexEPS

Myth & Reality In Equities Investing In India Today

Myth & Reality What We Think We Know And What We Actually Know

Myth 1: Falling Chinese Markets will take Indian Equities Down

No.

Chinese Economy

China GDP: $13 Trillion

Exports: 30%

Industrial Products, Apparels, Steel,

Import: 12%

Oil &Minerals, Chemicals, Ores

GDP: Agri: Mfg: Services, 9:41:50

Labour: Agri: Mfg: Services, 34: 30: 36

GDP Growth Rate: 7% to 4%

India $2.5 Trillion

15%

Software, Pharma, Textiles, Jewellery

14%

Crude, Gold, Electronics, Steel

GDP Share 17: 25: 59

Labour Share 51: 24: 25

GDP Growth Rate: 4% to 7%

Chinese Markets

June 14 to June 15: 120% Up

8% GDP growth for 10 Years resulted in a higher Earnings Base

PE @ 24 times, Excluding Banks @ 37 times

Banks have low RoA, high leverage, low provisioning, Value trap

Margin Funding @ 12% of Free float

225 IPOs last year, 223 were upward freeze on the first day

One of which went up freeze for 36 out of first 40 days

Electric Utilities with 12% ROE at 25 PE, $15B in Hangseng, $40B in Shanghai

2 out of top 5 trading stocks were retaill brokerage companies

Myth 2: Quantitative Easing & US Interest Rate Increase will make FIIs to sell and Exit Indian Equities

No.

US Markets

Myth 3: Indian economy & markets are integrated with Global Markets Really?

India Integrated With Global Markets

US & Global Markets

Falling Interest Rates Since ’08

Quantitative Easing

Multi year high in Margins

Sharpest & Longest Rally: 6 years

Physical Assets Lower In 8 years

India

Rising Rates

Tightening of Credit

Multi Year Low of Margins

No rally

Physical Assets Almost Double

Myth 4: Indian Corporate Earnings Have Turned Worse and No sign of Improvement

Earnings Growth

Myth 5: There is no fundamental changes since new Government took over, disappointing. No. Realty?

Inflation Decline:

-5.0

0.0

5.0

10.0

15.0

20.0

Per

cen

t Rural wage growth

CPI

WPI

Indian GDP Growth Rate Debate

Current Reforms

Governance Institutional Macroeconomic policy Sectoral

Decisive reduction in

corruption reflected in;

i.Clean and transparent

auction of coal and

spectrum

ii.Liberalization of gold

import regime, reducing

the rents intrinsic to

quantitative restrictions

i. Unleashing cooperative

and competitive

federalism by adopting

FFC recommendation and

creating Niti Aayog

ii. Close to securing political

agreement to launch

game-changing GST

iii. Pursuing the JAM agenda

in cooking gas

iv. Pursuing financial

inclusion by creating Jan

Dhan accounts

v. Initiating comprehensive

social security via

pension, life insurance

and accident schemes

i. Commitment to

fiscal discipline

ii. Increasing public

investment to

revive growth

iii. Facilitating

declining inflation

via agricultural

policies

i. Liberalizing FDI

in insurance,

defence, and

railways

ii. Deregulating

diesel, petroleum,

and cooking gas

sectors and

adhering to the

commitment to

deregulation

iii. Easing the cost of

doing business

Why Am I Bullish?

Why Am I Bullish

Commodity Decline: Oil, Coal, Metal

Improving Government Finances

Lower Inflation

Lowest Corporate Profit Margins

Minimal Capital Expansion in last few years

Demand growth in future will help sales & margin growth

Earnings growth will be exponentially high

Earnings growth will drive PE expansion

Shift of domestic savings from Physical assets will help PE expansion

What Will Drive Indian Equities in Years to Come Earnings Growth, As always

Earnings Growth

Where are we today? Sensex @ 25K, Investors @ Cross Roads

Market Cycles & Investor Actions

Where Are We Today?

Bull Markets Are

Born In Pessimism

Grow In Skepticism

Mature In Optimism &

Die In Euphoria