From an economic perspective, India is thriving impressively, standing as an oasis in the global desert. Our growth is primarily driven by government infrastructure spending. Trade exports and services are also now positively contributing to GDP growth. The only sector not meeting expectations is consumption. While the rich and upper middle-class sectors are experiencing growth in consumption, the lower middle income and poor consumption remains subdued. We hope and pray that consumption will pick up, just like investment has begun to in the private sector.
Macroeconomic Reality: Prudent Growth & Efficiency
Today, our fourth-quarter GDP growth number exceeded expectations. The full year FY23 growth is the fastest among major economies. This growth is not funded by injudicious and imprudent borrowing. Unlike economies which must borrow three and a half to four dollars to raise one dollar of GDP, we create a dollar of GDP by borrowing just 90 cents.
The government leads in investments. An election-bound government not only allocates more money to infrastructure but also accelerates execution. As capacity utilization improves, the private sector has started to invest. The only subdued part of the economy is consumption among the lower middle income and poor sectors.
“India is on track to become the world’s third-largest economy, up from the current fifth position. The IMF predicts this will happen in 2028, we predict it will occur in 2030, and British institutions forecast it for 2032.”
Yet, the journey from fifth to third is universally accepted. Today, as the fifth-largest economy, we are investing over a trillion dollars in fixed asset creation. This level of investment also indicates a brighter future.
The Equity Market Trinity: Flows, Sentiments & Fundamentals
From the equity market’s perspective, three things drive it: flows, sentiments, and fundamentals. Flows and sentiments can change swiftly, while fundamentals are like oil tankers — slow to turn.
1. Market Fundamentals
Fundamentally, Indian markets are fairly priced, roughly at about 18 times one-year forward earnings. It’s neither cheap nor expensive. They trade at a premium to all emerging markets. This earnings growth is likely to sustain.
- Banking & Financial Services: Banks have recorded profits exceeding two lakh crore. NPAs are low, margins are at an all-time high, profit growth is excellent, and most importantly, valuations are still reasonable. We believe Banking and Financial Services will continue to compound and outperform the market.
- Automobile Sector: Showing high profit margins.
- IT & Pharma: Subdued, slightly below expectations, but likely in the process of bottoming out unless something globally untoward occurs. As things settle down globally, order placement may resume, benefiting Indian IT and Pharma over the next six to nine months.
- Manufacturing, Capital Goods & Infrastructure: Capital goods, manufacturing, cement, and construction sectors are more or less in line with expectations and poised to outperform as part of global supply chains.
Therefore, it’s fair to say that fundamentals are robust, in better shape than most other markets, and we are at fair valuations, which demands neutral equity allocation from investors.
2. Liquidity Flows: Global Comparison & Domestic Strength
From a flow perspective, the market is heavily biased towards money. Foreign investors, after selling 2.5 lakh crore between October ‘21 and June ‘22, have turned buyers. Mutual funds and insurance companies are net buyers in the market every month. Retail and high-net-worth individuals (HNIs) are also buyers. Today’s environment has too much money chasing too few stocks.
The government opened a divestment program recently. For the time being, it seems like flows will outstrip supply and keep the market supported. Global emerging market alternatives highlight India’s relative advantage:
| Country / Market | Global Investor Outlook |
|---|---|
| Russia | An absolute no-go. |
| Brazil & South Africa | Relatively weaker structural fundamentals. |
| China | Extremely cheap, but Bank of America research aptly summarizes: “Too cheap to short, too mediocre to go long.” |
| Turkey | Currency depreciation and economic policies are dreadful. |
| India & Indonesia | The primary destinations for global investors seeking to diversify out of developed markets. |
More importantly, foreign portfolio investors (FPIs) realize that in all emerging markets, entry is easy, but exit can be difficult. This is unlike in India, where entry and exit are both easy. You sold 35 billion dollars between October ‘21 and June ‘22? Be our guest, take all your money back. It’s challenging to re-enter, though: FPIs bought less than 9 to 10 billion dollars back, and markets were already well above their October ‘21 level.
Given this situation, at lower market levels and cheaper valuations, FPIs, retail, HNIs, mutual funds, and insurance companies will all be buyers. This provides downside market support, maintaining stability. Thus, every market correction is an opportunity to buy.
3. Market Sentiment & Asset Allocation
Sentiments are always influenced by events: global energy prices, the Russia-Ukraine situation, and the US Fed’s interest rate policy will have temporary effects on our markets. Domestically, the biggest sentiment driver will be the 2024 election results.
It’s impossible to predict election outcomes, and it would be futile to base investment decisions on such predictions. We believe our fundamentals are robust, and while a government can influence speed, the direction is well set. We recommend maintaining disciplined allocation and using corrections as opportunities to increase equity weight.
- Market-Cap Preference: Valuations across large, mid, and small-caps are nearly in equilibrium. Recommendation is to be marginally overweight in large-cap and marginally underweight in small and mid-cap, using corrections to add to small and mid-caps.
“Manufacturing in India is a theme that’s taking off, especially for companies that can become a part of the global supply chain.”
Seven Key Structural Investment Themes
- Capex Cycle Revival:
India is about to embark on a multi-year journey of increased capex spending, providing a much-needed boost to the economy. Capacity utilization is high. The capex to depreciation ratio for all non-financial listed companies is at a historically low level. This means that the next phase of recovery in domestic demand will involve a significant pickup in private capex spending, helped along by healthy private balance sheets and a favorable policy mix. - Govt Focus on Defence, Railways & Infrastructure:
Budgetary capex allocations at both the Central and State level have increased significantly in recent years. The Centre’s allocation to roads, railways, and defence has accelerated. The government continues to focus on infrastructure growth, aiming to complete more than 50 km of highways every day. - Real Estate & Home Improvement:
The resurgence in residential real estate is a major multi-year driver. We are very bullish on the home improvement sector, anticipating sustained demand benefiting from both primary and secondary real estate markets. - Penetrating Financial Services:
The sector presents significant growth opportunities due to low banking and insurance penetration compared to other developing countries. Improving credit growth and manageable non-performing asset (NPA) levels provide a resilient foundation for long-term expansion. - Rural Revival:
Infrastructure push (roadways, factory expansions, new manufacturing plants) happens primarily in rural jurisdictions, directly generating local employment and boosting income levels. Additionally, increased allocation for minimum support prices (MSP) for crops will drive consumption of fast-moving consumer goods (FMCG) in rural regions. - Consolidating Industry Leadership:
Across telecom, banking, steel, cement, NBFCs, and aviation, larger companies are becoming bigger and strong companies stronger. This natural economic consolidation embodies the “survival of the fittest” principle. - Capitalizing on Global Supply Chain Shifts:
Driven by the China+1 strategy and government schemes such as the Production-Linked Incentive (PLI) program, Indian manufacturing is positioned for explosive growth. Furthermore, the “Europe+1” concept emerging from Europe’s energy crisis makes India an attractive destination due to competitive costs and economic stability.
Conclusion
Indian equity markets are fairly priced from a flow, sentiment, and fundamental perspective. While temporary global macro headwinds like US Fed pivots or geopolitical conflicts may create short-term volatility, the structural foundation is rock-solid. Investors are advised to maintain equal weight allocation and actively capitalize on market dips to overweight Indian equity.
Author may be reached at: eboard@icai.in