Hoping for 17 per cent CAGR and beyond?
Last week I had an opportunity to attend a select meeting with Mr Prashant Jain, CIO of HDFC Mutual Fund. He shared a few points and he felt some of the Government action is likely to turn around the economy. This is likely to push the GDP of the country. That means that those who stay invested in the equity market are likely to benefit. These have the potential to push corporate growth rate to 25 per cent in the years to come.
Some of the salient points of the meetings are:
*Removal of LPG subsidiary and direct transfer of cash to the needy will plug the leakage in subsidiary.
*Cash transfer for fertilizer.
*While paying electricity bills, consumers will be given 2 LED bulbs and a sum of Rs 10 each month will be recovered over one-year period. As a pilot project, it has been attempted in Delhi. This will save huge deficit in the power situation.
*NHAI is removing the stumbling block in the highway projects and this has helped to reduce the number of stalled projects.
The following are the points he expects will push corporate growth to 25 per cent.
- With inflation moving to lower trajectory of 5 per cent in few years, if interest rates go slightly higher than inflation, it will lead to good performance in the bond fund over a 5-year period.
Investors wary of equity market can participate in the bond rally to earn decent returns on their debt portfolio.
- Similar to the earlier instance, he expects for the next few years earnings growth to be 25 per cent and this will help to earn a pretty good return in the equity markets.
- He expects that Non-Performing Assets will not go up because in the past year, credit downgrades have come down and the silver lining is that credit upgrades are happening and this will be good for the economy. This will be good for lending companies.
- In the period of 1981-90, nominal growth was around 15 per cent (investment 9 and inflation 6). In the next 10-year period, it was similar number. In 2000-2010 (investment 6 per cent and inflation 9 per cent). Since then, investment has been 8 per cent and inflation 7 per cent.
So, when the nominal growth was 15 per cent, the Sensex was able to deliver 17 per cent. Good funds were able to deliver 5 percentage points over and above the Sensex. He expects this will be the return for next 5-10 years in the Indian Equity markets.
- From 1993 to now FII’s exposure to Indian equity markets have grown from 0 to 23 per cent. Whereas Indian investors have increased exposure to gold, which has delivered 9 per cent CAGR against equity AGR of 17 per cent. So, the point is that you should be invested in equity for a 17 per cent and beyond return for the years to come.
Given the positive state of the economy, investors who have patience will earn good returns for their investments not only in equity but also in debt.