Stock Market Gyrations & Long-Term Investor
For the long-term investor, it pays to step back a bit from the day-to-day gyrations of the stockmarket and focus, instead, on the big stories that determine the long-term direction of the market. Towards that end, AMP Capital Market’s chief economist Oliver Shane has picked out 12 megathemes that are the current backdrops for the global market.
Some of his themes are pretty obvious ones such as the trend towards offshoring, or the fact that the rise of India and China will mean higher commodity prices, including higher oil prices. Other themes include the IT revolution and the fact that geopolitical tensions and environmental pressures add to business costs. Ageing populations in the developed world is another theme.
But apart from these well-known trends, there are two other interesting insights. One is that the gains from lower inflation, which occurred as globalisation and freer competition pushed down prices, may be coming to an end. This disinflationary trend was responsible for a sharp fall in bond yields and a rise in price-earnings ratios in the 1980s and 1990s in the developed markets. With inflation stabilising, the extra boost to investment returns from falling inflation is now gone.
A somewhat similar argument is also made for the rising share of profits in GDP. Shane says that corporate profitability had been boosted, thanks to reduced union bargaining power (again, partially a consequence of globalisation) and higher productivity. This trend, too, has been played out, and profits as a proportion of GDP are unlikely to rise further. That would mean slower profit growth.
His recommendation: favour assets that offer decent yields (i.e., better valuations) and/or clearly identifiable growth advantages or scope for greater ‘alpha’, for example, Australian shares, non-residential property and infrastructure, Asian shares as opposed to US shares, and traditional government bonds.
What megatrends can be identified for India? Some analysts have said that the low-hanging fruit for corporates, such as rationalising manpower, supply-chain efficiencies and reducing the cost of capital, have already been picked. But that doesn’t take into account the enormous scope still left for improvement in the operating environment, such as relaxing rigid labour laws, or improving infrastructure. There is still plenty of scope left for productivity increases, especially in Indian manufacturing and agriculture.
But, perhaps, the biggest opportunity for Indian asset appreciation will come from the demographic dividend. Unlike most of the rest of the world, including China, the number of young people of working age is increasing in India and the number of dependents is shrinking.
Think of the huge demand that will be unleashed as these people enter the work force. And this demand will be not only for goods and services, but also for financial assets. Also, as people get richer, they save and invest a greater proportion of their income.
One study attributes more than 40 per cent of the higher growth in the East Asian Tigers versus that in Latin America during 1965-90 to the faster growth of the Tigers’ working-age population, combined with their better policies on trade and human capital development (Bloom and Canning, 2004). This creates a huge opportunity for investments in Indian assets.
Source: BW
- Auto - IDBI Cap
- Auto Ancilliary - NB
- Cement - ICRA
- Capital Account Convertibilty - Citi SB
- India Strategy - Kotak
- Hedge - EC
- India Macronotes - ML
- Max India - Kotak
- Participatory Notes - A view
- When Stars Align - Citi SB
- For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get. - Warren Buffett
