We wish you a very happy Diwali and a prosperous year ahead. As Samvat 2070 comes to an end let us take a moment to review the year gone by. The Indian markets have had a stellar run over the last twelve months. The euphoria surrounding the Modi government's ascent to power is yet to die down. The markets are trading near life highs. Mid and small caps are flying and retail investors are returning to the market after many years. In the midst of such positivity it is not easy to say anything negative.
However, in all the positive sentiment surrounding us we must not lose sight of the fundamentals. Consider the improving macro-economic environment. The government has unveiled reforms in the energy sector recently, taking advantage of the fall in crude prices. Reforms in labour laws and coal mining have got the markets excited as well. More reforms can be expected. Along with the pick-up in GDP growth, the fiscal deficit is likely to come under control over time due to these measures. This will have a moderating impact on inflation and can encourage the Reserve Bank of India (RBI) to ease interest rates. However, all companies and sectors will not benefit equally from these measures. There are a host of other factors to be considered as well.
No matter what anyone will say, India is not out of the woods. A lot of effort is still needed to repair the economy. However, the markets have already discounted this. While the Sensex is up about 29% over the last year, the Midcap index is up about 45%. In this rally, a lot of stocks that have run up do not have the fundamentals to back them. Legendary investor Warren Buffett would agree when we say that only when the tide (i.e. liquidity) goes out, will investors find out which stocks were the strongest.
However, if you do your due diligence before picking stocks, these market movements will not worry you. As we have said time and again, in the long run, only the fundamentals drive the stock market. This applies equally to individual stocks too. Thus, if you are still on the sidelines and feeling left-out, don't worry about it! Just look out for fundamentally strong companies and invest in them when their stock prices offer a good margin of safety. These are the only two things that you need to do. So ignore the noise surrounding the economy and its prospects and stick to the fundamentals. You will do well in the markets!
Once again we wish you a Happy Diwali a prosperous year ahead!