Initial Commentary
In the last outlook, we had mentioned about profit booking by short term investors. We got a glimpse of the same, when the market retracted from levels of 18,100 of the Nifty and corrected to 16,800 before closing out at 17,100 on 30th September 2022.
Global Scenario
Currently, we see most of the headwinds coming from the global scenario. The Fed’s stance and commentary was very clear that they are not worried about the economic growth at this stage and they seem to be fine with the hard landing of the economy. The employment data suggests strengthening in the US Economy but there is one more angle to it, and that is, after great resignations in 2020 and 2021, the number of people approaching the job market has significantly gone down and in fact the US Labor market is facing an employee crunch. USA and Europe are now seen fighting inflation like never before. In Europe, the inflation went up from 2% to 10% and we are approaching winter with sky high gas and oil prices. Electricity is one more big shock coming from the Russians which could impact the global economy as well. Rise in interest rates, with more in the pipeline, coupled with inflation are making things worse in US and Europe which could eventually weigh down on India. Technically USA is not in a recession ( going by drop in GDP growth for two quarters) but markets discount things in advance and has fallen almost 22% making it a bear market case.
The Indian Economy
The economy is doing good in spite of global recessionary winds mainly on account of the domestic nature of the economy, consumption and no dependence upon tourism. Though our interest rates have gone up and inflation is expected to be at 6.75% for FY 2022-23 with a growth of around 7% is still painting a better picture. Tax collection is good with GST numbers of September 2022 at Rs. 1.47 Lakh Crore which shows that we could settle at around Rs. 1.50 Lakh crores soon. The direct tax collection too shows a good up tick and with a good monsoon the rural economy will also pick up and support the economy.
Some key numbers to track are as follows:
1) Wholesale price Inflation: 12.41% for the month of August 2022;
2) Consumer Price Inflation: 7% for August 2022
3) GDP Growth Rate: 7.3%
4) Forex Reserves: USD 553 Billion
The RBI is judiciously using its foreign exchange reserves and, on that front, we have never splurged money. COVID is certainly coming down, and we expect growth to come back with the festive season just around the corner. Next two quarters India is not showing any kind of weakness looking at data.
Credit Offtake
Credit offtake has seen robust growth on a Y-o-Y basis, almost around 18% – which has been the highest in the last 9 years in the backdrop of new proposals and stuck projects regaining momentum. Sustained improvement in wholesale and retail credit has supported this momentum and the festive season being around the corner will just support this growth going forward. Consumer credit usually goes up with higher inflation and demand is robust even now.
Consumption
Consumption has shown a good demand uptick in the month of September and we expect it to continue going forward. Looking at FMCG, Real Estate and vehicle sale numbers (including luxury vehicles) we feel India is on the right track when it comes to consumption. The white goods market is growing rapidly too, and is expected to grow at an impressive CAGR of 12.78% in the coming years. Increased awareness of technology, ease of operation, rising temperatures have all contributed to the growing demand of white goods especially in the post Covid era. So far as passenger vehicles are concerned, the industry is likely to see record estimate of sales in this fiscal year. Manufacturer friendly Government policies are likely to clear up supply related issues on this front and could provide a further boost to these numbers. Similarly, commercial vehicles have seen a bounce back in numbers with a projected growth of 12% to 15% on the radar. The improving macro-economic environment of the country and the radically changing business outlook has supported these numbers. Growth is concentrated in the goods carrier and construction activity focused vehicles but is picking up in other areas.
Equity Markets
In this month’s outlook, we head slightly negative on equities for the following reasons:
1) Weak global backdrop;
2) Chances of global recession being very high;
3) Current recessionary conditions which could last a year or so;
4) FPI continue to withdraw money from emerging markets; and
5) Valuation wise, Indian markets are 10% higher than the historic valuation and we are 20% more expensive that Asian markets
We feel that it is difficult to foresee a positive trend when the whole market is hit by higher interest rates, costlier commodities and low intake due to a depreciation in the rupee. The overall structure of the market has become weak, and we expect Q2 and Q3 results to be better which could possibly support market valuation of equities. In isolation, the market appears expensive, and the sheer footfall and hectic activity in shops & malls gives a hint that the overall economy is doing better. However, the market shall continue to remain volatile, as there is no positive trigger for an uptrend unless inflation settles down globally. One could liquidate their holdings in mid cap funds and allocate them in a phased manner into Balanced Advantage Funds which could help them combat this volatility better and take advantage of rupee cost averaging. It is possible that the market may go down 10% even from a current level or there could be a consolidation phase of 3-6 months ( time correction ) and that will be another great entry point for investors. This will also help to accumulate equity over a period of next 3-6 months.
Midcap and Small Cap
A look at the mid cap and small cap stocks, could lead to an observation that the valuation of mid caps is not cheap anymore with the recent rally. Small caps still trade at decent valuations and post correction one can look at select small cap funds. Currently, we feel that large caps are the safe bet to park funds and wait for the right opportunity to enter midcaps & smallcaps.
Fixed Income
The RBI is fighting a currency war presently, taking a hit on its forex reserves which have gone down to USD 553 Billion as highlighted above. The rupee has seen a 7.5% depreciation in FY 2023 till date. The RBI has gotten down its growth forecast from 7.6% to 7% as of now. RBI raising the repo rate to 5.90% and the call rates are around 5.90% to 6% – we see further rate hike and the repo to touch 6.30% eventually. With defending the rupee, the RBI is sucking liquidity from the market as well. The Government spending is offset by currency leakage. The RBI Governor’s remarks were more of accommodative in nature as he was categorical that his decision depends upon the situation at the time of the next policy review or the Monetary Policy Committee meeting. Looking at the historic difference between India 10 Year G-Sec and USA 10 Year G-sec the gap is found to be the lowest ever. The Indian 10 year has reached 7.34% but looking at the global inflation and the aggressive Fed stance we may see the 10 Year moving toward 7.50% to 8% if repo rate is to reach 6.25%. This will all come down or correct once the inflation cools off and the Central Bank can moderate their stance. With oil and commodities coming off, inflation may remain a local issue with the issue of gas prices in the US and Europe.
Summary
1) Our outlook on equities remains negative for the short term – say 6 months. The valuation premium is high and it will correct.
2) Book profits in midcaps since the valuation appears steep and unsustainable hereon;
3) Global recession is imminent and we may face the brunt of it sooner or later;
4) Post the festive season, massive slowdown may hit consumption;
5) Higher cost of capital, inflation and global slowdown is likely to hit top line and margins;
6) Recessionary trends usually last a year, and buying into the correction seems like a good option;
7) Continue buying in a staggered manner so that one can eliminate the risk of timing the market – in which no one has succeeded.
8) We do expect Q2 & Q3 results to be positive but it is mostly discounted by markets looking at weak global cues.
