It’s champagne time for fund managers and investors as Indian Bourses are at a life time high amidst an unexpected rally in global equities. Sensex at 63601 made a new high this morning while Nifty at 18885 is just a whisker away from its previous high of 18887 seen in November 2022.
What is heartening is the breadth of the rally, the mid-cap and small-cap indices are also at a lifetime high. Global liquidity, Make in India, and the consumption theme are at the heart of this investment frenzy. And this is just the beginning if one takes a 5 to 10 year perspective as the next decade belongs to India.
The formalisation of the Indian economy – demonetisation, universal banking, GST, and digital initiatives, like Aadhar and broadband, telephony and internet services have expanded the equity participation from the domestic investors.
The start up culture and successful listings of the new gen businesses have also paved the way for entrepreneurial spirit. The growing corporate culture and the equity cult has fruitfully resulted in channelizing the domestic savings into productive asset creation. Market capitalisation of equities at USD 3.4 trillion is fairly representing the USD 3.7 trillion Indian economy.
Indian Markets Fertile For Foreign Investments
Government initiatives over the last 5 years have laid a solid foundation for the takeoff. Successful banking NPA and real estate resolution, PLI, focus on infrastructure, Digital India, judicious fiscal management during pandemic, impetus on renewable energy and some tough political decisions on management of energy costs are some of the key achievements of the Modi Government. Post-COVID, 'Make in India' has taken off in a big way with the global manufacturers shifting to India.
While the domestic investors in India had been dipping into equities all through the turbulent phase of a global selloff last year, it is the FIIs & FPIs who are back with a vengeance after having pulled out more than Rs 2.78 lakh crores last year. Last 3 months have seen more than Rs 70000 crores of FPI investments pushing mid-cap and small-cap indices to lifetime highs. Domestic mutual funds are still sitting on more than Rs 80000 crores of cash thanks to the SIP investment culture.
FPI Sector Allocation.
Source: NSDL, IIFL Alternative Research
FMCG: Strong FPI Inflows.
Source: Trendlyne
FMCG, auto, reality, banking and financials have given spectacular returns in the last 4 months. More than the sectoral performance, the market breadth is reaffirming that the India story is already airborne. The good part is that the valuation in mid-caps and small-caps are not yet over stretched. After having consolidated for the last 18 months since the November 2021 highs, the price earnings ratio looks more reasonable. Going ahead it’s the mid-caps and the small caps which could offer spectacular returns as they still remain under owned.
However, the Frontline stocks look fairly priced at these levels. Nifty at 18800 levels is at its long term Price earnings average. India has always been a bit more expensive than some of the other emerging markets and now the reason is more clear, with a per capita income of USD 2200 and USD 7700 on PPP basis and a population of more than 1.40 billion, it offers tremendous value creation over the next 5 to 10 years.
Despite the income inequality and concentration of wealth, India still is a huge market whether it is luxury goods or the everyday FMCG and groceries.
Shorter Term Outlook
Amidst the growing concerns of a synchronised recession in the developed economies, India stands out as a formidable economy in the making. It has been growing at more than 7 percent for the last 2 years making it one of the top performing economies.
However will India be an outlier and escape pain of global economic turmoil ? Yes and No.
In the shorter time frame the ongoing global slowdown will slow down the Indian economy as well. Rising interest rates and global demand compression are bound to have an adverse impact on the Indian economy. Any global capitulation can pull down the Indian equities but such a correction will be a great buying opportunity as the economy looks more resilient than the other economies.
In a shorter term in the next 6 to 12 months, the markets could be volatile as the top 3 economies, that is, USA, EU and China, accounting for almost 65 percent of the global GDP, are facing serious monetary and economic challenges. To make matters worse BRICS is emerging as a big Challenge to the US and allies, this time it is an economic war so far. The Russia Ukraine war has triggered currency wars and ‘de-globalization’ which will have longer term implications on global economic contraction.
The Present Global Rally
The global economy is heading for a long deflationary phase as the demand compression is getting more visible in the declining commodity and crude prices. The soft feelers since the last 2 years are likely to soon transcend into high decibel crescendo and so we can expect a long turmoil in the Global economy. The global investment community is highly divided in its outlook on equities.
The present global rally has surprised the markets as the financial markets are at an increasing divergence from the real economy. The latest rally seems to be a function of liquidity and the AI exuberance. The world created $7 trillion of new money during covid and the liquidity froth will continue to keep the asset prices at divergence with the real economy. While the global equities are trending higher at present eventually the economic fundamentals will bring in a steep correction.
Nasdaq has rallied smartly on the back of new exuberance on the future prospects of AI. It’s the FANG stocks along with NVIDIA and other few tech stocks which are pushing the index. 95 percent of the stocks are languishing! Artificial intelligence is without doubt the next big thing after the industrial revolution for human civilisation but in the shorter term it may just be another valuation hype and a bubble in the making.
DAX is at a lifetime high while Germany is officially in a recession. New Zealand is also in recession now. Demand destruction is gathering pace now which is reflected in slipping crude and commodity prices in spite of oil production cuts by Saudi and OPEC nations.
China’s Loss is India’s Gain
China looks to be heading for long term structural problems and this is bad news for the world. Having served as the factory of the world accounting for more than 30 percent of the global manufacturing, it is facing flight of capital and shifting out of manufacturing facilities by the MNCs.
Post-Covid this has accelerated. The banking and real estate mess along with the colossal debt of more than $23 trillion poses an insurmountable challenge. The much hyped China reopening has been a damp squib. No wonder the global commodity and crude prices are slipping on fears of a global demand compression.
In the next 2 decades ageing and declining population would be the biggest negative factor shrinking the work force and overall economic activity. China's growth story may have seen its peak. I hope it is not a repeat of what Japan went through in the last 3 decades.
(The author is Managing Partner at Alquimie Advisors. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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