What should stock market investors make of economic growth data and terms like economic growth and GDP growth rate of India? How does economic growth data impact stock prices?
MOHIT SATYANAND: Rising tide lifts all boats. Everybody loves growing economies and with good reason. Because companies grow, economies grow. When economies grow, companies grow. And growing economies can mask a lot of temporary inefficiencies in a company. If companies are basically unsound, if their managements don’t understand what they’re doing, then it remains only temporary. But if they are able to grow out of them, then these rapidly growing economies can create enormous wealth. They create enormous wealth for all participants in an economy whether it is producers, employees or consumers. And we’re seeing that right now. We’re seeing that right now in the Indian economy where the Indian economy is the fastest growing major economy in the world. And the money keeps coming into the Indian stock market. And this drives a sort of what I call “tezi mein tez, mandey mein manda” (in Hindi language) kind of psychology. Because when the money is chasing stocks, people are looking at the rear-view mirror and saying stock prices have gone up in the last 6 months.
Therefore, they will keep on going up. So, more people put money in. Now at the economic level this creates a lot of benefits. Because what it does is, when that money comes in from abroad, firstly it means that for a country which is a net importer of goods and services like India, it means that it reduces the pressure on our foreign exchange. And therefore it helps to dampen inflation.
Secondly countries like ours growing, countries like ours are also perennially short of investable funds. They always need fresh capital. So this money coming in also at the margin reduces interest rates by making more investable funds available. And this again makes it easier for the economy to grow. So broad picture, a growing economy is great for investors.
UDAYAN RAY: Of course, the other side of it, of course, Mohit, is in a rising tide there is flotsam and jetsam. You have got lots of things floating around. So, you obviously have to look into the company.
UDAYAN RAY: But Mohit before we wrap up this particular segment, I think it’s worthwhile pointing out in this particular segment that most Indians haven’t really taken advantage of the enormous amount of growth that’s happening in the (Indian) stock markets. It’s anybody but the Indian who is benefiting from the stock market. Isn’t it?
MOHIT SATYANAND: That’s absolutely true, that’s absolutely true. And I think it’s a great pity that Indians have not taken advantage of the stock markets. I just want to make three brief points over here.
The first is that it is not for everybody to invest in stock markets directly. If you are convinced of the broad case for equities, then you’re probably typically better off investing through a mutual fund.
Secondly, Indians seem to be under this illusion that real estate is the best kind of investment to make. I completely disagree because real estate investments are very illiquid. That means you want to sell a house today, you can’t sell it today. It may take you 3 months, it may take you 6 months, it may take you 12 months, and the transaction cost is extremely high. Typically on the buy side it is 7-8% because you are going to pay 5-6% as registration fee, plus to the broker etc.
The third, which is partly true, is that in the past stock markets have been subject to a lot of unscrupulous promoters, manipulation etc. But I think that’s come down hugely. That’s come down hugely. Indian markets are fairly well regulated. The transparency of what’s happening in the market is a lot more. The frequency of data availability is a lot higher. And you have really good fund managers out there who can manage your funds for you. So, it has been demonstrated time and time over again in economies all over the world that the most rewarding way in which to participate in a growing economy is through the stock markets.
UDAYAN RAY: There you have it. Good economic growth leads to good stock market performance— rising tide; it’s a wealth creation opportunity. When I am talking about wealth, I am not talking about very rich guys. Even you can create wealth. Your investments can do well. Your kids can go abroad or to any good college here, and you don’t have to take an education loan or anything. You can have a fairly decent good and enjoyable retirement. The list of benefits is endless. You have to smartly invest in stocks, directly or indirectly.
