We have thought of presenting our reading of current situation in a different, crips manner this time. It is split into 10 points covering different factors of what may be relevant aspects of economy to know in one’s wealth creation process.
1. GLOBAL SITUATION
Global situation is very fragile currently. China has cracked down on online learning, Alibaba is completely silenced and fear of default of their second largest developers is posing a new threat. Shortage of coal leading to power crisis is for real, as out of the total China’s power source, 72% comes from thermal power. China slowing down will bring down global growth expectation which can’t be ignored. Excesses created in real estate sector have started haunting China’s solid financial and banking sector. It is said that about 500billion USD default (current outstanding of Evergrande group) may not pose any threat to China’s economy which is close to 15 trillion USD. It will be important to see how smaller banks, financial institutions and foreign funds will be paid back. Any fall of these institutions will have short term ramification on the global equity markets. We are keenly watching these developments and it is not easy to ignore them.
2. GLOBAL COMMODITY PRICES
If China slows down, generally prices are expected to come down but power shortage may lead to some supply-side inflationary pressure. Commodities like steel, copper and aluminum will remain at elevated level in India for few more quarters.
3. INTEREST RATES
U.S. Fed had indicated cut down in bond buying starting December quarter and possible rate action in 2023 on account of inflation and economic recovery. If there is problem in China, then Fed may postpone taper and that might help equity market globally to go up again.
Interest rates will slowly inch up in India and we have seen good amount of economic recovery and some sectors/indicators have reached pre-Covid level.
4. COVID SITUATION
Good news is the control in spread of the virus and no sign of third wave. Vaccination pace has picked up with 80 crores of population administered with the first dose. India has managed situation well and businesses have started to see a full comeback.
5. SECTORAL VIEW
Three major sectors which contribute to employment are auto, real estate and IT, all these sectors are showing good recovery except for chip shortage in auto industry. Auto demand is
huge but affected by supply side constraints. We are concerned about auto sector if there is no immediate resolution to the problem. Information technology is booming with fresh orders, and it is the best time they have seen till date. Government policies helped real estate sector and allied industries. Overall exports have seen healthy growth and we expect consumption explosion to happen going ahead.
Banking sector is showing a mixed trend as private players are likely to do well, and public sector bankers are still struggling. New restructuring request from SREI Infrastructure group of Rs. 30,000 crores knocked our hopes of any early resolution for PSU Banks to tie over NPAs.
Ideally rupees should have appreciated to about Rs. 70 but RBI is doing effective management to contain any wide fluctuations in the currency and support exporters. Looking at current Balance Of Payments situations and Current Account Deficit, we feel rupee should hold 73-75 range comfortably provided oil remain below 80 USD.
7. RBI BORROWING
RBI is very optimistic on tax collection and GST, thus there is no plan of any additional borrowing planned in the second half. GST collection exceeded 1.17 lac crore and likely to go up from here on and Direct Tax collection has seen significant growth post September quarter advance tax collection.
8. Bond yields and Debt market
10-year G-sec. improved to 6.18% and settled around 6.20% post RBIs second half’s borrowing calendar. Short-term rates came down over the last month due to huge liquidity in the system. Call rates crashed to a low of 2.50% from 3% month ago. Our view doesn’t change, and we maintain our cautious stance. We prefer roll-down strategy and high-quality papers and would like to avoid any credit risk. We prefer PowerGrid and India-grid Invits than apportioning entire debt allocation to debt mutual fund schemes.
9. EQUITY MARKET
Indian equity market had a dream run and it definitely went ahead of time and fundamentals. Especially in sectors like IT and Specialty Chemicals valuations look a little stretched. Month of September saw prices correcting to about 5% to 10% in these sectors. Opening of economy is very well received with sectors like entertainment, hospitality, and travel. Stocks moved up due to expectation rather than fundamentals. Commodities saw huge profit-booking and as it is proven earlier, these stocks generally move in a cyclical manner. We have always maintained that sectors like pharma and commodities are usually complex to play with.
One should moderate their expectations from equities going ahead. Align your equity exposure to the desired level accordingly, as per your long-term mandate of asset allocation.
Exiting equity completely on drastically reducing it may not be a good decision on following grounds:
A. The growth expectations for 2021-22 and the following year is maintained at 9% plus.
B. One cannot apply 2008 scenario as underlying economy is much stranger and growing
C. The debt levels and leverage Indian Corporates is much lower in relative terms to justify valuation premium.
D. India is more of domestic economy and new China plus 1 factor will help India in the longer run
E. India is on the cusp of attracting fresh investments and government is working hard to support this by bringing in various policies such as PLI incentives and formation of gift city, increasing FDI limits in different sectors, etc.
F. India is more of a consumption economy and with growing employment and pick up in the economy one expects consumption to go up. One may witness short term volatility coming from global front and part of it is already factored in where Nifty has corrected to 17500 after touching 18000. Some more correction is on the cards, but we don’t see market crashing on any known reason.
10. What should you do The best part of undervaluation phase of market is over . Now on action will be very stock specific and performance difference between best funds and next will widen. It is better to remain very stock specific at this stage and choose funds with bottom-up stock picking strategy. Any incremental exposure to equity should be done in graded manner and ideally done post watching quarter results.
We recommend cutting down sectoral exposures and stay as diversified as possible, except for exposure to banking and financial sector.
Avoid any leverages while investing in equities and prepare for bouts of volatility.
Any bad news from China or globally, will scoop the global market in the short term and any significant correction will be a great opportunity from medium to long term perspective. With current earnings growth momentum, India is looking attractive for investors from a long-term perspective