April 2019: Micro-economics is more important than macro in investing

As India votes in an election spanning a long, seven phases and the results are awaited on 23rd May, 2019, we have had several conversations with investors about the election result and what impact it is likely to have on our portfolio. About a year back when we spoke to our clients, the persistent question was whether we needed to change our strategy going into an election year. We, as we normally do, expressed our inability to predict these matters and preferred to stick with our existing strategy. What has followed is a volatile sequence of events during the last financial year, whereby the Nifty, after being subdued through much of the year, now stands close to an all-time high, though the internals of the market are battered and the average investor is not feeling too good about his portfolio at the moment. In about 3-4 weeks from now, we should have clarity on the new government at the centre.

Since 1996, we have had 6 general elections in India. At the median, Nifty delivered 14.9% return in the 12 months prior to the elections and 5.1% in the 12 months after the elections. The maximum weakness, during the 12 month period prior to the election, was witnessed in 2009 when the Nifty fell 26.7%. This was primarily due to the global financial crisis. In the 12 months after elections, the Nifty was down 6.6% after the 1999 elections. This was the period when the market was dealing with the aftermath of the dot com peak in April 2000. Apart from these negative observations, the Nifty has been positive or nearly neutral both before and after elections. In general, there is a weak correlation between stock market returns and elections.

Over the past 5 years, we have seen several key structural measures taken by the government which have long term implications – the roll out of GST, which was pending for many years, the Insolvency and Bankruptcy Code, increased automation at the governance level, deepening of direct benefits transfer, etc. We have also seen a period where inflation seems to have been reined in. Over the last 5 year period (2014-19), real GDP growth has averaged 7.0% annually. In the prior 5 year period too (2009-2014), GDP growth averaged 7.1% pa. Apart from the 2000-02 period, when we had 3 consecutive years of weak monsoons, the Indian economy has been growing consistently at about 7.0-7.5% pa. Though some experts have doubted GDP growth calculation numbers, one can’t ignore the fact that the Indian economy has been growing at a brisk pace over several years, and is likely to do so over long periods of time. The Indian economic growth will be led by domestic consumption due to the favorable demographics, and a consumer whose balance sheet is healthy as indicated by overall indebtedness.

As investors, it is important to monitor government policies and how they impact businesses. However, it is more important to stay focused on sustainable business economics, long term growth of the businesses and their valuations. Over the past few years, though the consumer has benefitted in several areas of the economy (examples include telecom, real estate, airlines, etc), one can’t say the same about the businesses operating in these sectors. Many large businesses in these sectors have been wiped out, despite very strong consumer demand. On the other hand, there are several companies which are expected to do well irrespective of key government policy changes. For example, the banking sector has seen several changes and policy impact over the past 2 decades. While some banks like HDFC Bank have done quite well through this period, there are other players whose balance sheets are bleeding. In a nutshell, micro-economics is more important than macro-economics in the business of investing.