Initial Commentary
The Russian- Ukrainian war news still continues after 7 weeks although it seems to be heading away from a nuclear scale and now limited to these two countries. The world will see many challenges as geopolitical equations are changing fast. This month we would like to discuss more about impact analysis of all these factors on economy and markets in general
Inflation
Most discussed topic today is inflation. Oil prices and commodities had already led to inflation globally. That is now aggravated due to supply and logistics issue. M3 globally reached over 20% as most of the Central Bank were doing quantitative easing. Thus, impact of inflation is expected to vary from country to country. India conserved fund even during pandemic and never did any aggressive stimulus.
On the other hand, India imports 85% of its oil demand. If we import more of the discounted Russian oil or oil itself comes down, then we can expect some cooling off of inflation in India. Last printed number which is closer to 7% is way beyond RBI’s comfort zone and we really need to see how RBI trades off between growth and inflation. It is also observed that inflation is better digested when there is a decent demand. We don’t feel India will face stagflation, although few countries have a threat of the same. Inflation is expected to come off in a second half of this calendar year. Looking at global commodity prices of steel, aluminum, copper etc. we don’t feel that this inflation is transient and will hurt economy in 2022-23.
Currency
Indian Rupee remained very stable during last 2 months of global rout on currency. RBI did a lot of timely intervention and use good amount of Reserve to defend rupee. We believe that FPI has turned buyers in Indian equities and big outflows have stopped. Oil import bill and opening up of economy is likely to put pressure on the Rupee. On the other hand, robust growth in service export is expected in 2022-23 and is likely to lend a helping hand with 617 billion USD Reserves. India is better placed in terms of its Forex Reserves. With China expected to slow down to 4% GDP and global growth to be muted, India may witness more FDI like last year closer to 50 billion USD in 2022-23.
Earnings Growth
We are concerned about Q4 and Q1 earnings for 2022-23 owing to the commodity prices and general inflation. We have seen soft commodities, agricultural commodities, construction materials and oil prices going up very quickly. It is very difficult for most of the corporates to pass on this cost inflation easily. Thus, you may see margin compression in few quarters to come. We have discussed this in a last month’s Outlook. Thus, earnings growth is likely to disappoint again and most of the equity markets are underestimating this fact. Expectation of earnings growth on the back of low base and opening up of economy is high, likely to
be more than 20% in 2022-23. Market has rallied in anticipation of high growth, but we opine barring financial services and IT, rest of the sectors are likely to witness margin pressure in the near term for few quarters.
Market Valuation:
Market has moved up significantly after a correction in February in the last month. We don’t expect any significant move further unless banking sector get rerated. Bank Nifty has to take a lead for markets to outperform going ahead. Valuations are in fair zone, but we recommend waiting for Q4 and Q1 numbers before investing additional funds.
We are very positive over long-term India story; India will be the fastest growing economy globally and will attract fresh capital going ahead. India has become 5th Largest market globally with 3.2 trillion USD surpassing UK recently. Unemployment rate has come down by 7% and hiring has reached pre-covid level. Indian unorganized sector is still affected, and recovery has started was opening up of economy. India VIX at 18.5% indicates receding volatility in the stock market. Looking at changed equations like higher borrowing cost, higher commodity prices lower demand due to inflation, etc. We feel we have a case of good margin compression ahead and lower multiples (PE). There are going to be few stocks which will outperform the markets from Banking,
Finance, IT and opening up theme. Markets will start discounting 2023 earnings now with this perspective and we are looking at a reasonable valuation but near-term volatility due to inflation and geopolitical events are making as nervous for adding fresh equity at the stage. India will attract funds in equities as Indian macros and fundamentals are looking good.
Geopolitical Situation
Although the fear of third World War and nuclear attack threat has subsided, we are still not out of the woods yet. Sanctions and support at two major factors which will decide how world will look at Russia going ahead. World is now completely integrated place and decoupling is stuff and disruptive.
Result Season
We expect a mixed bag of results this quarter end. Auto sector will remain under pressure and so will the commodity consumers. Though earnings growth due to lower base can be banked on. Thus, we feel it’s a mixed bag, likely to throw some surprises on the negative end. But market driven with liquidity so far and want for investment options will enable people to flock towards equities
Interest Rates:
Interest rates globally would rise eventually. Inflation and government big bang borrowing program will lead to higher cost of borrowing in India. RBI still has adopted accommodative stance to support growth. Better than expected (over 50%YoY growth in tax collection) may make government borrow less than the budgeted borrowing. Government in consultation with RBI has finalized the borrowing of Rs. 8.45 lacs crores out of Rs. 14.31 lacs crores in the first half of 2022-23. This is a gross number, but it would mean weekly tranches of 32,000 to 33,000 crore spread over 2 years (6.15%), 5 years (13.85%), 7 years (10.77%), 10 year( 20%), 14 years ( 15.98%),30 years (13.25%), 40 years (13.85%) with floating rate bonds at 6.15% issued fortnightly. 10-year G Sec has moved up to 6.85% , 65 BPS over last year. We expect gradual rise in cost of funds, yields and interest rates across the maturities for 2022 23. Today market has factored in 50 BPS hike in repo rate and Fed hiking seven times in this financial year.
April 2022- Monetary Policy Expectation
• RBI may not opt to pause again
• Indian GDP Expectations slashed by many, by 50-75 BPS for 2022-23.
• Inflation may reach never seen level if things don’t come under control
• RBI likely to take baby steps in tightening money /liquidity
• RBI might do reverse repo hike as a liquidity tightening measures. Increasing repo rate may not be help as liquidity is very high.
• Rupee to see tight correlation with oil price movements.
• India likely to get included in Global bond index
• It is not important that inflation is supply side or demand-side as the number if 40 years high in US, where monetary action is inevitable
