The Indian indices were high by early December on the back of expectations that interest rates would stabilize and not much further tightening would happen. The Ukraine War is still raging, and the final word on the US recession is still not out. It is an open secret; everyone talks about it, but the markets are not reflecting that. As investment advisors, wealth managers, or portfolio managers, it is important to share information about key economic developments and how they may impact our clients’ investments.
The US economy and pretty much the global economy are not in great shape. There are headwinds in terms of higher interest rates, and global geopolitics will linger. Indian indices have weathered the twin storms of the global recession and the geopolitical Ukraine crisis. This may not be sustainable if the US slips into a sharp recession or if their markets correct sharply.
Over the long term, India remains on a strong footing with all the structural reforms in place. Valuations are lower than they were during most of 2021. With all the structural reforms in place and the focus on infrastructure and manufacturing incentives, we expect earnings growth to continue. The impact of higher input costs due to inflation has likely abated. This could translate to a 15% p.a. growth in earnings for 2023 and 2024. Other than a massive global recession, this expectation should play out over the next couple of years.
The markets do factor in earnings growth in the short term, i.e., the next two years. India is planning
a 176% increase in capital expenditure. The government’s net tax revenues during the period reported a healthy growth of 11% just in the last seven months of this financial year. Real GDP also grew 9.7% YoY in H1FY23. Exports are on the upswing, and oil prices are getting stable. The equity markets, in our view, are assuming long-term secular growth.
Here are some of the reasons we believe India is well-positioned:
- Though growth estimates are cut, India is still the fastest-growing economy
- Credit growth, Government Capex to keep Investment up.
- Inflation is 5.88%, projected to soften further, but we are yet to see below 5% projections. RBI intends to first keep inflation below the tolerance level of 6%, but the target is 4.5%.
- Interest rate hikes have not been ruled out, but most likely have plateaued
- CAD -1.2%. This is below the 3-4% of GDP which is considered to be sustainable for a developing economy,
- Manufacturing PMI, Services PMI, Business Confidence, Consumer Confidence all Up
- Both Direct and Indirect Tax collections have been buoyant. As a result, despite the increase in Govt spending, the Fiscal deficit has remained in control.
- Commodity prices are coming down, which can result in better performance of companies in the coming quarters. Oil is likely to touch USD75.
- FII Flow positive since April 2022 (except for a small dip in June 2022)
Conclusion
As an investor, one has many questions related to equities that are posed to investment advisors, wealth managers, or portfolio managers. It is our duty to call out the way things are without any conflict of interest. As SEBI Registered Investment Advisors, it is our fiduciary responsibility. So here it is: while we have had recent all-time highs, the geopolitical and global recession bad news is still not over. So our outlook as of now is stable. With the indices having recently risen, one should temper expectations in the near term. A slowing global economy will impact external demand, resulting in a slowdown of the Indian economy.
We believe that investors should stay cautious given the worries about the US slipping into a pronounced recession. The corollary is that one must maintain their asset allocation as suggested by their registered investment advisor, and take advantage of any sharp down moves that the market may offer from time to time. Long-term monthly investments can continue.
