The global economy is slowing down. The three drivers of global growth – the US, Euro Zone, and China are all facing formidable headwinds.
While the Euro Zone is reeling under an unprecedented energy crisis and is on the brink of a recession, China is struggling under the twin impact of a deepening property market crisis and widespread Covid-related lockdowns.
The sustained sharp rate hikes by the US Fed have started impacting economic growth in the US.
The likelihood of the US slipping into recession is high. This gloomy global macro backdrop has impacted stock markets globally.
In the mother market ‘USA’, as on 27th September 2022, the S&P 500 is down 24.3 percent from the peak and Nasdaq is down 33.2 percent from the peak.
The 11-nation Euro Stoxx 50 is down 24.6 percent from the peak. In sharp contrast to this clear bearish trend, the Nifty is down only 8.5 percent from its peak.
While the Dow has gone below the pre-pandemic high, the Sensex is 36 percent higher than the pre-pandemic January high.
What does this distinct outperformance indicate?
Can India decouple from the global market trend and remain an outlier? Or will the sharp global economic slowdown impact India, too, and trigger a sharp correction?
India’s growth outperformance is driving market outperformance:
It is important to appreciate the fact that the fundamental factor driving India’s market outperformance is India’s growth and earnings outperformance.
Indian economy is expected to grow by 7 percent in FY23 and 6.4 percent in FY24 making India the fastest growing large economy in the world during this 2-year period.
Why are economists upbeat about India’s growth prospects even in a fast-deteriorating global macro setting?
There are some distinct trends indicating India’s resilience and potential to outperform.
Credit growth in India is at a 9-year high. The 16 percent YoY growth in credit is indicative of an economy in a sharp growth rebound.
The twin headwinds that marred India’s growth and earnings recovery -highly leveraged corporate sector and stress in the banking system – are behind us. The corporate debt to GDP is at a 15-year low and the banking sector is in a sweet spot with improving asset quality and rising credit demand.
The economy is on the verge of a capex. Capacity utilization in manufacturing at 75.3 percent (RBI) is aiding the CAPEX. Leading indicators like rising demand for capital goods reinforce this optimism. Pick-up in investment, both public and private, can trigger a virtuous cycle of growth.
Since India’s economy is outperforming, India’s equity market can also sustain the current outperformance. But that doesn’t mean
that India would remain immune to a global market sell-off.
US inflation holds the key:
The US Fed’s ultra-hawkish stance and the message that “we have the tools and resolve to persist with tightening till the job is done” has pushed the dollar and US bond yields to levels not expected earlier.
The relentless rise in the dollar index (114 on 27th September) and the sustained rise in the US bond yields (US 10-year yield touched 4 percent on September 27th) are roiling equity markets globally.
So long as this trend of a rising dollar and rising bond yields continues, equity markets will continue to be weak. FPI outflows will impact India too. But India will outperform: a 10 per cent correction in S&P 500 may lead to only a 4 to 5 percent correction in Nifty.
On the other hand, if the incoming data indicate US inflation declining, the markets will rebound. Then again India will outperform.
Go for a cautious investment strategy:
Since the global scenario is fluid and volatile, investors may adopt a cautious investment strategy. It makes sense to retain a high equity exposure.
But as a measure of abundant caution investors may opt for a portfolio comprising of 50 per cent equity, 30 percent fixed income, 10 percent gold, and 10 percent cash/ liquid funds.
Those investors with a high-risk appetite can have a higher exposure to equity. Within equity, it would be desirable to have maximum exposure to performing sectors like financials, autos, capital goods, IT, construction-related segments and select FMCG and pharma.
There are promising mid and small-caps across sectors that are attractively valued. Investment in this segment can be done through the mutual fund route.
From the short-term perspective, India appears overvalued relative to its peers. At 17,000, the Nifty50 is trading at around 20 times FY23 earnings. But, a few months from now, the market will start discounting FY24 earnings.
At 17,000, the Nifty50 is trading only at around 17 times FY24 estimated earnings. This is a reasonable valuation.
Once the present turbulence dies down, India’s superior growth and earnings story will attract more money – both domestic and foreign – into the market. Therefore, the near-term headwinds notwithstanding, prospects for the market look bright.
First published in Economic Times