I have been bullish on Gold and Equity Market (particularly India) as asset class since last two years and will be in short to medium term. Obviously, as a good analyst, I must answer the question why? I also don’t like to be a verbose and wanted to stick to the point & it is: where to invest and why?
In my view, following major reasons should help a reader to understand the flow of money & take right position, in right asset class at right time. Global liquidity and it’s expected flow in Indian Equity market is the focus of this short article.
Global Economic Situation & where India stands:
- Global growth, now estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017.
- Global interest rates are at ultra low-level and there seems to be no way out of it or I will say no intention to come out of this addiction. These globally low-level of interest rates have created yield crisis in the financial world.
- About 30% of all developed worlds bonds about 10-13 trillion US Dollar (USD), yielding negative returns. (Germany, Japan, Switzerland, The Netherlands etc.)
- Bond prices fall when interest rates rise. And interest rates rise along with inflation. At today’s ultra-low yields, even a small uptick in interest rates will wallop bondholders
- World central banks primary focus is avoiding deflation, and in my view, will not increase the interest rates in near future. They will keep doing round of QE (Quantitative Easing) under different names, hence there is possibility of Inflation in near to medium term and in this scenario, any sensible investors would not go and buy negative yield bond for pensioners of west.
- World bank retains India’s growth forecast at ~ 7.5 for 2015-2016.
Hence, if developed world investors just make small shift in their asset allocation from negative yielding bond to Indian equity, it would be around hundreds of billion dollars. Yes, I agree that foreign portfolio investors would not put this money blindly and will expect certain policy clarity from present Government. (like no retrospective taxes, reforms and transparency etc.) and I believe that new government clearly understands it and most importantly working towards it.
Investors should also look at the Geopolitics, (I don’t want to ignore this important point) and that’s where India don’t have any control as one cannot change their neighbour. but now days Islamic terrorism is not only India’s problem but also with Europe & to some extent US. It’s global challenge.
Summary is: We have the developed world where investors are supplied with abundant liquidity, buying bonds with negative yields, and on other side, developing world (particularly India) where huge capital is required for development of Infrastructure & can offer reasonable returns of 7-9% comfortably for next decade. Hence, it’s just matter of time when the money from developed world coming to Indian shores and taking Indian stock market to new highs in next decade. Only exception would be adverse geopolitical events which also, in my view can only defer the flow but cannot stop it.