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The central government has absolute power with a clear mandate, but the directions of the center have to be well executed at the state level. So, there are many things that are still not in Modi’s hands, say Ramdev AgarwalIn an interview with Joint Managing Director, Motilal Oswal Financial Services Narendra Nathan And Sanket Dhanorkar,
Are we looking at a multi-year bull run?
I think the market has not yet priced in to the full potential of the economy. For the first time a true nationalist has come to power with a clear majority. A new energy is being circulated in the whole country. My understanding is that the market is yet to understand the difference between over 300 seats for the NDA and over 272 seats for the BJP alone. See how cabinet posts are assigned – BJP allies have got limited posts and their negotiating power has been reduced. The entire power is in the hands of the government. The political landscape is quite different now. The economy is on the verge of a historic positive turnaround.
The car is the same, but the driver has changed. Now it is being driven by a Formula One driver. So, the acceleration will be dramatic. It will be visible very soon. Today we are growing at 4.5 per cent. The pace of growth is likely to accelerate over the next few years. A lot will happen in five years. It will be interesting to see the level of the index at that time. In the process, investors would make a lot of money, as the market would have discounted that growth two years earlier. It will not wait for the fifth year. If all domestic and global factors align, the markets will go through the roof.
Are there challenges to a weak economic recovery?
The current optimism is because a majorly changing political system has been fixed. There is no doubt that the new government has been completely empowered in this election; A very capable person has been given the mandate. Everyone is bullish right now. But one must live up to the expectations. Lastly, the directions of the Center have to be well implemented at the State level. Otherwise it will be a waste. There are many things which are still not in Modi’s hands.
Many other factors will also play a role. Good monsoon, favorable global climate, peaceful borders etc can change the whole scenario. But how many stars will align, only time will tell. Therefore, a lot will depend on external factors. I am also looking at how the new government deals with inflation, which is symptomatic of a deeper problem elsewhere. The government has to remove the supply side bottlenecks. A weak currency cannot make a strong country. So inflation should be low. This will be the beginning of growth, investment etc.
The rally, so far, has been driven by hope. When will Fundamentals take over?
News headlines and making money are two completely different things. We should not come in the limelight. The focus should be on who will actually make the money. In most cases, it will be a company that is making money right now. Very rarely a company that is broken today will make money tomorrow, unless there is a complete change in the dynamics of the business. Today we have nothing to go. Therefore, wherever there are discrepancies in the economy, they will return to normal levels. Right now, it’s only about the promise of a better tomorrow. Some of these promises will have to take shape in the budget.
What should be the first priority of the new government?
India has to become more trade friendly. Lastly, the country needs to create jobs for its growing youth population. Who will create these jobs? More than the government, it is the businesses that will create jobs. Businesses can create employment only when the business environment is conducive. They cannot sustain growth without creating jobs. So the government has to be business friendly. All obstacles must be removed. We need businesses to take more risks as this will create more jobs.
Will mid-cap stocks outperform large-cap stocks right now?
It really depends on the company. Mid-caps were lagging behind for a long time; Smallcap and more. In the end it has to be concentrated. Large-caps are now seen to be highly priced. Investors’ appetite is limited at these levels. Most of the action is in the low-quality, low-price segment. Smaller investors are clearly buying lower quality items, thinking the price is low. But, even if it moves into high valuation territory, the low quality will remain. This is where the whole game ends. Sure, high quality stocks are expensive now. But that doesn’t mean your portfolio should be junk. If you get quality at a reasonable price, buy with modest expectations. Such names are few and far between. But, even if you get 3-4 such ideas in a year, you can still make money. The challenge is to be patient and keep investing. Filling up with junk will be a disaster, but if it works, you get a multi-bagger. High-quality investors may underperform in a fast-moving market, but will outperform throughout the cycle.
Can we expect earnings upgrades any time soon?
A 12-15 per cent increase in income is definitely possible this year. As the economy improves, sectors such as cement, steel and automobiles will pick up. Oil and gas can also contribute to earnings growth. Currently, corporate profits contribute around 4 per cent to GDP, which is close to the bottom of the band. At the peak of a cycle, it can go up to 7-8 percent. Assuming a modest growth of 13-14 per cent in GDP, this will double in rupee to Rs 220 trillion in the next six years. Now the question is whether the current profit of Rs 4 lakh crore will increase to Rs 8 lakh crore or Rs 16 lakh crore. If it maintains the current ratio, it will be Rs 8 lakh crore. If it touches the upper end of the band then it will be Rs 16 lakh crore. If this happens and the PE multiplier remains the same, the market will go up four times. Profits will increase as the economy moves from 5-6 per cent to 8-9 per cent growth. So the market is likely to go up to the stratosphere level from here.
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