7 reasons to invest in stocks

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By Guest |  14-03-17 | 
 
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Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

Last year, the passing of GST in parliament and demonetization dominated the economic landscape in India. This year, Rajat Sharma of Sana Securities, a stock market analyst and SEBI registered investment adviser, cites many reasons as to why he is bullish on stocks. 

1. Favorable macros

Low inflation and crude oil prices will enable the Reserve Bank of India, or RBI, to reduce interest rates in 2017, perhaps by up to 0.50%–0.75%. Further, with a huge amount of money coming into the banking system post demonetization, the central bank will have to ensure loan off take to keep the banking machinery in order. This is another strong reason why the RBI will be encouraged to cut interest rates. 

2. Impact of demonetization

It is true that demonetization is going to have a materially negative impact on the economy in the short term. Consumption-led companies will be the first to feel the heat as consumers scramble for cash, impacting demand for packaged goods, durables and consumer discretionary items. The much-awaited earnings recovery, which was on the horizon, now looks at least two quarters away due to slowing down in the consumer demand. But over the medium to long-term, demonetization will boost GDP growth and equity markets as more transactions will be accounted in the formal economy.

As the government collects higher taxes, it will be able to fund projects in the infrastructure sector and recapitalize PSU Banks. Capital expenditure from government coffers will play a key role in reviving core sectors of the economy and more importantly will boost loan growth for banks. This is because while the government funds the equity tranche of new projects, further capitalization for these projects will be based on debt.

Further, with so much money now in banks, most depositors will look at organized markets products – like mutual funds (both equity and debt) and stocks in 2017 to park their cash. It is unlikely that a large portion of this money will get withdrawn and retained back as unaccounted money. Going by what we have witnessed in the first few months of 2017, this trend is already clear.

3. Low oil prices

As India imports 80% of its oil requirements, the economy has been a big beneficiary of the drop in the price of crude oil. The Indian government spent $65.92 billion on crude oil import in FY16, a fall of 43.38% from the $116.44 billion outgo in the FY15 and $143.63 billion in FY14. The government of India spends most of its revenue collection on buying crude oil. Lower crude prices are golden for the government.

Due to falling crude oil prices, India’s macro-economic fundamentals such as inflation, fiscal deficit and current account deficit have improved meaningfully over the last couple of years. Decline in the price of crude helps the government manage its finances better as it translates into lower subsidies on petroleum products (LPG and kerosene), thereby resulting in lower fiscal deficit.

It is also one of the biggest catalysts for high infrastructure and defense spending. Indian companies which use crude as a major raw material get a big lift in profitability margins.

4. Passage of GST

As the Good and Services Tax rolls out this year, it would be extremely interesting to see how this huge task will be implemented by the government. One has to discount the initial hiccups and implementation challenges, but over the long term, GST is set to change the course of the Indian economy.

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India would benefit in multiple ways — from efficient inventory management, to unified taxation, easy compliance, and create a common market place. All these factors will eventually boost the bottom line. As margins improve, so would the underlying stock prices.

5. Union Budget

The Union Budget 2016-17 has unveiled crucial economic reforms including measures to ramp up fiscal spending. Key highlights, impact of which will be felt over the medium to long term are:

a) Lowering of corporate tax rates for companies with an annual turnover of below Rs 50 crore. This will encourage tax compliance and create an environment where smaller businesses will prefer to incorporate than operate under proprietary or partnership models. This will be the first step in the journey of young businesses which, in the future, will find a place on the bourses.

b) Tax incentives given on purchase of homes will not only benefit housing finance companies but the overall financial sector as money lying idle in bank accounts will get channelized by way of home ownership.

c) Giving infrastructure status to housing will allow more money, from domestic and foreign players, to flow into that sector.

d) An all-time high allocation of Rs 3.96 lakh crore to the infrastructure sector benefits a number of ancillary sectors in addition to infrastructure.

Going forward, the focus will be on lowering corporate tax rates and increasing spending on infrastructure and housing.

6. Positive signs in the U.S.

U.S. unemployment numbers are at multi year lows (4.8% in January 2017). Being the biggest consumer of services and products in the world, the health of the U.S. economy is of prime concern to manufacturers and service providers in India (and indeed for other parts of the world).

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Further, the Federal Reserve, the central bank of the United States, recently increased interest rates to 0.75% after they remained at 0.25% for over 8 years (i.e. since 2008 until earlier in 2016). Fundamentally, when the Federal Reserve raises interest rates it is a confirmatory sign that there is enough liquidity in the U.S. economy (and indeed in the world), and that there is no need to persist with low interest rates. Higher interest rate gives the central banks a cushion to create more liquidity in future in case there is need to spur the economy going forward.

7. Random Market Theory

On a lighter (yet historically random but factual) note, stock markets always deliver uneven returns. In CY2016, the Nifty and the Sensex delivered zero returns, same for the previous financial year. But when you look at the last 3 year consolidated returns, the Nifty and the Sensex have generated over 10% return (on average) each year.

The only way to catch that hyper bull market that we have all seen in past is to stay invested in quality, and don’t predict a thing.

The fact that the last 2 years have delivered no returns is a good sign for 2017!

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