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Larger companies continue to grow at rates higher than GDP, stay invested despite the news

Our analysis suggests that many of the larger companies, leading the Nifty, continue to grow at rates higher than nominal GDP growth and are trading at valuations that are reasonable. Moreover, as and when the economy recovers, growth rates will be stronger than long term expected growth rates as companies start re-stocking their inventories.

Equity markets in December 2019

● The large cap oriented Nifty was up 0.9% for the month and it is up 5.8% for the year (since 1-Apr-2019). Equity markets seems focussed on a select few large companies which are doing well despite the overall economic weakness.  

● Mid-cap indices were down 0.7% for the month and 5.5% for the year. Overall mid-cap weakness has been persisting for nearly 2 years. 

● The S&P 500 (US Markets), in INR terms, was up 1.9% for the month and 18.4% for the year. 

 

Debt markets in December 2019

● Median returns of the Top 10 liquid funds averaged 5.2%, down from the past year as interest rates have been coming off.  

● Government bond yield marginally inched up by 0.05% in December. There is increased concern on interest rates increasing as fiscal deficit target seems difficult to achieve and there is increased possibility of the government increasing its overall borrowing program. 

Factors affecting markets
 
1. Overall economic weakness persists and GDP growth is slowing down to under 5%. Most economists are debating whether this is a normal cyclical weakness, which should lead to a recovery soon, or if it is a structural weakness which may persist for some more time. 
 
2. Our analysis suggests that many of the larger companies, leading the Nifty, continue to grow at rates higher than nominal GDP growth and are trading at valuations that are reasonable. Moreover, as and when the economy recovers, growth rates will be stronger than long term expected growth rates as companies start re-stocking their inventories.
 
3. Globally, there is some light at the end of the tunnel, as the US-China trade war seems to be ebbing. Chances of a mutual agreement between the two countries seems high. 
 
4. In this context, it does make sense for investors to stay invested despite the overall negative news. 
 
Summary
Despite the economic weakness, valuations of top companies in India and their performance indicates investors should stay invested. 
 

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