Traders should expect lower returns amid bleak economy

By Ronojoy Mazumdar

India is likely to see a slower pace of economic growth over the next few years, which means stock investors should expect lower returns, according to analysts at asset manager Quantum Advisors Pvt.

India’s $2 trillion stock market has rebounded more than 40% from a March bottom, joining a global rally in defiance of a bleak economic outlook. But whether it can deliver the 12-15% annual return frequently touted by local asset managers in the long term depends on how fast India’s economy will grow, Arvind Chari, head of fixed income and alternative investments at Mumbai-based Quantum, said in a note.

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“GDP growth does matter to corporate profits and to stock market performance,” said Chari. “India's golden period (March 2003-March 2011) in terms of economic growth was also the best period for corporate profitability and stock returns.”

The country’s gross domestic product shrank 23.9% in the three months to June from a year earlier, the worst contraction among large global economies. While India had been posting quarterly growth in the 5-10% range since the start of the millennium, signs of a slowdown were emerging even before the pandemic.

Covid-19 has only exacerbated existing challenges for India’s economy including a bad loan crisis, high unemployment, low levels of investment and policies that have hit small businesses. And the government has provided only limited fiscal support given constraints on revenue growth. As a result, Quantum assumes lower than 6% real GDP growth for the next five years.

The continued rise in stock prices combined with declines in profit expectations have driven the Sensex to its highest valuation multiple since 2008. Quantum recommends investing in stocks of smaller companies outside the benchmark index that represent better value.

“In the very near term, with virtually zero earnings visibility, equities are likely to be driven by the success or failure of outcomes of policies dictated by a government that is still not coming to grips with the economy’s real problems, and fears of disruption caused by the virus,” said Chari.