The year 2014 was phenomenal for Indian stock markets. A change of the Government at the centre and hopes of economic reforms fuelled the rally. The benchmark indices touched lifetime highs. However, the euphoria could not last long. By the end of the FY15, markets started showing signs of nervousness. As the weak earnings season and monsoon worries suggest, the expectations were a bit unreasonable. But not completely misplaced!
There is still a lot to India's growth story. While we may not have reached there yet, economic indicators suggest that we are moving in the right direction. As suggested in an article in Livemint, higher indirect tax collection, increased commercial vehicle sales, pick up in the industrial and manufacturing activity and most importantly, focus on infrastructure spending do suggest the green shoots in the Indian economy.
At the same time, there are enough signs to be skeptical as well. These include weak monsoons, high debt on the balance sheets of infrastructure companies and a banking system saddled with bad debts.
So what should investors expect from the markets?
We do believe that equity markets can be rewarding in the long term. However, to make real gains in the market, investors would be better off following a bottom up approach, rather than tracking broad economic indicators. In the past, stocks that have become multibaggers have gone through the same economic cycles as witnessed by losers. What has set them apart is the quality of the management and business fundamentals. To conclude, we believe that one should ignore the noise of economic data such as on inflation, RBI policies, and IIP data and so on. And instead should try to get the big picture and long term view right on corporate earnings and management quality.