scorecardresearch
Indian markets: With waning momentum, theme to shift from Growth to Value.

Indian markets: With waning momentum, theme to shift from Growth to Value.

"With de-mon damage set to linger longer, it is easy to guess that the consumption will be the first casualty"

ArunaGiri N
ArunaGiri N
Markets loveto stitch a story. When the year began in 2016, it offered more than therequired recipe for stitching a consumption story. It all started with paycommission bounty. Budget took it from there and built on it with huge boost torural spending. Monsoon moved next to spruce up the spice with its windfallgains on rainfall. But, for any story to steamroll into spellbinding saga, itneeds the final bollywood-style splurge in the form of mega budget. This finalpush came in the form of EM carry trade i.e. gush of dollar flows into Emergingmarkets in search of better yield, that became a formidable up-tide. Whatfollowed was a stupendous surge in consumption stocks in the next six monthsthat eventually elevated the valuation of some sectors to unsustainable levels.Some of the shadow banks shining at 8+ times the book was one such scaryoutcome of this saga. But in the end, the fiction fizzled out on the lethalcombo of Trumponomics and Demonetization. De-mon derailed the over-heatedconsumption theme while Trump Tantrum triggered the much expected reversal ofEM carry trade. Both miraculously coincided (on the same date of Nov'8th to beprecise) to bring the perfect storm to Indian stocks.

As the new yeardawns, bruised markets are set for a makeover, if we may call so. When there isno story to stitch, as being the case now, markets find refuge in Value. With de-mon damage set to linger longer, it is easy to guess that the consumptionwill be the first casualty. Story is set to repeat on FII flows, except that itis in reverse this time. Outflows from EM will magnify the consumption crack ashow the inflows glorified it during the up-tide. Going forward, the theme thatis likely to dominate the early part of 2017 (at least) will be "Growth tode-rate and Value to re-rate" as someone succinctly put. In other words,when momentum moderates, Value comes to the rescue. This trend will gain moretraction on the likely divergence between FIIs action and domestic flows. WhileFIIs rush to the exit doors, domestic flows will gather steam on the expectedshift in savings from physical to financial assets on Govt's crusade againstblack money. More so, with the weakening outlook for both property prices (onprospects of stronger benami act) and for gold. This divergence between FIIsand domestic funds will gravitate the markets to bottom-up stock picking (valuetheme) given the tendency of local funds to dabble in broader markets (smalland mid-caps) in contrast to FIIs who fancy the larger cousins.

That said,it is not all gloom and doom for momentum theme. The later part of 2017 mayhave a surprise in store. The churn from growth to value is based on thepremise that EMs will see continued outflows on stronger US prospects i.e.faster Fed rate hikes and surging dollar index. While this may be the case inthe early part of 2017, one may not be so sure about this on the later part. Aswe move more into 2017, more realistic view may emerge on growth prospects forUS which might temper the rally in dollar and consequently one would see moreobjective flows for EMs. On the domestic front, with base-effect kicking in thesecond half, supported by GST gaining traction, growth and consumption themesmay revisit in the 2nd half of 2017 with vengeance. It is going to be aninteresting year to watch out for!

But forlong-term investors, the question is not about Growth or Value. Can it be bothi.e. Value embedded with Growth. As someone wise once said, long-term returnsin stocks are function of two critical factors i.e. buying price and earningsgrowth. First one represents Value and the second one stands for Growth.Long-term portfolio returns are delivered by the synthesis of Value and Growth.Deep downturns in the markets provide stellar opportunities for such synthesisto steamroll. In this context, current market weakness is a wonderfulopportunity to create value from delayed (not denied) growth!! If historic datais anything to go by, FII sell-offs have always been a boon for long-terminvestors. Below chart brilliantly captures this phenomenon. The succeedingyears of FII sell-offs, have always delivered huge returns to investors (pleasenote "always"). Going by this, when the year ends in 2017, investorswho have capitalized on the current fall induced by FIIs will have more thanample reasons to cheer.

This is notto say everything is rosy. The damage the de-mon has inflicted will take awhile to heal. But, markets mired in its manic mood set by FII sell-off, havechosen to ignore the medium and long-term prospects of changing financiallandscape driven by demonetization. Markets seem to be under-estimating thedramatic multiplier effect of shift from informal to formal economy. Whenmarkets price-in only the short-term risks, not the medium to long-termprospects, which usually happens during aggressive sell-off by FIIs, subsequentyears have always been hugely positive. Needless to say, current period is onemore such opportunity for long-term investors.

By, ArunaGiri N, founder & CEO, TrustLine Holdings Pvt. Ltd