We were always of the opinion that our economy would see a short term boom due to low interest rates and cheap oil. In addition to low interest rates and low fuel prices, we now have a fiscal policy that promises to be growth oriented for the next few years. Our belief is that India’s economic resurgence is set to continue for at least for a few years, if the govt follows its currently stated policy. We saw a massive policy shift from the govt in September 2019 through the massive corporate tax cuts. This signaled a marked shift in govt policy towards supporting businesses and increasing share of profits in GDP over using its resources to put money in the hands of the masses. If this right wing/BJP/Vajpayee Govt methodology is persistently abided by then we can be sure that the current economic resurgence could well continue into the next few years.

There are two ways in which you can grow an economy: You can grow it by passing money onto the hands of the labor class. The labor gets more income, it then spends. Consumption then goes up and and that lifts capacity utilization. This causes companies to invest. As companies invest you create more jobs, prosperity and start a virtuous cycle. The other way is that you pass on support and money to businesses. You count on boosting the share of profits in GDP to start an investment cycle. This causes job creation. Wages go up and consumption comes in. This creates a virtuous cycle of more investments and higher output.

Our view clearly is that the second method is clearly the better one but also the more treacherous one. It’s better because you can create sustainable growth while keeping inflation in check. In 2010 we created 10% growth but the same policies also created even higher inflation and this caused the whole thing to come to a halt. We use the term treacherous due to the political ramifications that the second method can have. Remember that in this method you must use spending power and elbow room with policy making to support businesses and help them boost profits. Whilst in the first method you can pass on freebees to the masses. Remember how the Vajpayee govt polices turned a fledgling economy into a sustainable 8% growth economy but their political tenure came to a screeching halt. The opposition come to power simply by offering voters freebees. We feel in the Indian context too the option of supporting share of profits seems like the better one as India is country with excess labor and supply shortages.

September 2019 through the massive corporate tax cuts, signaled a marked shift in govt policy towards supporting businesses and increasing share of profits in GDP. The govt basically signaled its intent to go back to trying to boost the share of profits in GDP. I remember watching the finance minister answer a question on how the budget benefits the labor class post the recent budget. Her response was that she’s investing money and that will create jobs and boost wages. We’ve seen several moves by the govt in the past 12 months that mark a sharp shit towards this policy. Change in labor laws, the production linked incentive schemes, the corporate tax cuts and several things in this budget point in that direction. The govt is now committed to reward the entrepreneur, to get the profit share in GDP higher and therefor create an investment cycle which will then create jobs and demand. This we feel is the right approach for India. This approach will result in increase in corporate profits and an increase in share prices.

Another important factor that will favor India and Emerging Markets for that matter, in terms of capital flows, will be currency. It seemsnow that the federal reserve is committed to keep interest rates low for the foreseeable future. It seems committed to bring inflation to about 2% to 3% and keep it there; something that has not happened since the global financial crisis. Add to this the Federal reserve and the US govt seem committed to their cash infusions to stimulate the economy. This in our view should result in a decline of the dollar and this augurs well for Indian and Emerging Market stocks.

All bull markets & bear markets we’ve had so far follow very similar patterns: They start with a mood of extreme pessimism, which then converts itself into doubt, this then coverts to some degree of optimism and finally a bull market ends with Euphoria. Bear markets start at the at the peak of optimism and they end when sentiment is extremely depressed, as they were in March last year. At the moment we feel that we are no where near euphoria levels. Infact this is probably most doubted or maligned stock market rally that we have ever seen. We would say that we are currently probably somewhere in the second stage of a bull markets which is a market climb met with doubt and skepticism. Our view is that we have a long way to go before we’ve seen the peak of this one.