Two biz lessons from India vs Australia Cricket Test Match, straight from the Fund Manager's desk

Ambit highlights that cricket fans would recall the recently concluded 3rd Test Match between India and Australia in Sydney. At the end of 4th day, victory was all but confirmed for Australia, only to be denied on the last day by a historical batting innings that lasted for more than100 overs which helped India draw the match. There is a business lesson in it for everyone too. It was a game of patience and resilience which reminded us of Indian economy and market movement in 2020. The year 2020 was marred by uncertainty and a Black Swan event where survivability, and not growth, was the key concern a few quarters back. A long ‘innings’ of lockdown was followed by a gradual unlocking of the economy.

The economic recovery since then is a reminiscence of the partnership between Ashwin and Vihari in the last session of that 3rd Test Match. The leading Index is up 90% from its 23rd March bottom, when the outlook was extremely pessimistic. While investors grapple with the question of what to do next, we look at some of the Green Shoots and why we believe that investors should remain invested.

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1. The Road Ahead – Why should one remain invested?

A) Reasonable valuations:

There is an old saying that “returns should be assessed on an absolute basis while valuations on a relative basis.” On an absolute basis the index is at an All-Time-High, but not on a relative valuation basis. The Nifty-50 valuation on Price to Earnings (PE) basis has gone through various phases of expansion / contraction since 2003, where earnings were a key catalyst. Going ahead, Nifty EPS is expected to grow on the back of macroeconomic recovery and strong corporate earnings which might lead to multiple expansions as seen in the past.

B) Interest Rates – The Biggest Catalyst:

One could think of the role of interest rates in the economy as salt is to food - lower is better, higher is worrisome! Interest rates have a bearing on PE multiples too. Reduction in inflation, and subsequently interest rates have led to declining yield on investments. Therefore, a 20x PE multiple in the current scenario cannot be compared to a 20x PE multiple in, say, 2010 when interest rates were substantially higher.

2. Green Shoots of Economic Recovery:

Various economic indicators that we track closely are showing signs of recovery as the economy makes its way back to normalcy.
i. Manufacturing PMI is at decadal high and has remained above 50 (which indicates expansion) for 6 successive month
ii. Labour availability is back to 80-90% across projects post an exodus of labour migration.
iii. GST Collection for Dec’20 grew 12.6% YoY to Rs 1.15 Lac cr. A steady increase gives confidence on increased government spending, as it’s a major source of funds for the government
iv. Auto sector witnessed growth in wholesale auto numbers and an increase in waiting period indicated towards a revival after nearly 2 years.
v.  Government Spending: Increase in overall government spending by +4.7% YoY in Nov’20 vs. +0.4% in Oct’20, led by increased capex spend (+12.8% YoY in Nov’20 vs. -1.9% in Oct’20) & revenue spending (+3.7% YoY vs. +0.7% YoY in Oct’20). This provides confidence on recovery in the capex cycle which should bode well for Industrial earnings.