What's happening? We believe it is important to view events in the right context.
What happened through the bull rally over the last 12-18 months was that a lot of future growth and earnings got priced in. Investors saw an economic recovery on the horizon - both structural and cyclical. Now, with a lot of optimism already priced in, investors will be on the lookout for concrete outcomes.
So let's have a look at how demand is panning out at the ground level right now.
We came across an article in Livemint that sheds light on the consumer demand landscape. If government numbers are to be believed, consumption expenditure is expected to grow by 11.8% YoY during the January-March quarter. Let's put this number in a proper context. In the December 2014 quarter, the growth in consumption expenditure was a meager 3.5% YoY. In comparison, the projection for the March quarter seems too optimistic; and more so because growth in the corresponding quarter of the previous year was a strong 7%. So it's not even a low base effect.
There seems to be a lot of contradictory perception of demand. While on the one hand, consumer sentiment surveys are showing an optimistic picture, the actual consumption figures don't seem to add up. One of the reasons that demand is likely to be muted in the short to medium term is the slowdown in rural and semi-urban markets. As per the article, some of the factors that have caused this demand slowdown are below normal rainfall, slowdown in government spending in rural areas, fall in global agricultural commodity prices, slowing rises in rural wages, and a drop in gold prices.
In our view, these are legitimate reasons for the slowdown in consumption to persist in the short to medium term. However, beyond the near-term challenges we believe that there strong long term growth drivers for India. With inflation levels easing and interest rate down-cycle kicking in, a sustainable economy recovery may not be too elusive.
So, there are two things that we would like to say... One, the economic forecasts and real economic outcomes are never the same. And so is the case with stock prices. What investors price into the stocks do not always match with real earnings. So stock price adjustments are always going to be there on either side... Don't be overwhelmed when stocks run up too much. Don't be depressed when corrections happen.
Two, when you study economic data, avoid focusing too much on short term events. Instead try to identify long term trends. This will help you focus on the big picture and avoid wrong decisions emerging from panic.