Health of your Wealth Sep '22

1.

India’s Growth Continues to Diverge from Global Growth

The Indian economy has become an Oasis in the Desert. It continues to show signs of stability even as other world economies slow down.

IMPACT: POSITIVE

Remarks: In the post-COVID scenario, India has emerged as the fastest growing economy in the world. Despite a major slowdown across the world, multiple tailwinds like China+1, Atma Nirbhar Bhaarat, Make in India, PLI Schemes etc have catalysed economic growth.

Capex expansion and higher credit growth shows optimism for business activities in the next decade. McKinsey’s CEO Bob Sternfels quoted “It’s not India’s decade, It’s India’s century”.

2.

India… A Fast-Growing Economy with lower Leverage than the World

The dynamics of Indian economy have been an outlier from other economies in the post-covid scenario.

IMPACT: POSITIVE

Remarks: Economies can grow at a faster pace with the help of higher leverage. However, leverage comes with risk. Indian corporates, on the other hand, have been deleveraging their balance sheets. As the data shows, credit to non-financial sector has grown from 2008 to 2021 across the globe be it advanced economies or emerging markets. EXCEPT in INDIA. A lower leverage in the balance sheet reduces the burden of debt obligation resulting in a positive impact in the profitability & cashflow of a company.

3.

INR standing relatively strong against USD

INR has depreciated 2.5% MoM while 9.5% YTD against USD whereas other major currencies like Euro, UK Pound, Japanese Yen, Chinese Yuan, South Korean Won have depreciated as high as 12% - 26% YTD.

IMPACT: NEUTRAL

Remarks: Currencies across the globe are depressing against US Dollar amid the aggressive rate hike by US FED. However, Indian Rupee is standing comparatively strong as compared to other currencies. Multiple factors attribute to this performance of INR

• Higher export in engineering goods - shift from net importer to net exporter in sectors like smartphones, white goods etc.
• RBI accumulation of forex reserves during good times - enable RBI to liquidate the forex to stabilize INR
• Growth visibility in Indian corporates – FIIs have increased allocation to India.

4.

Noise of High Inflation will be a Thing of Past!

Inflation in the US stood 8.3% in Aug 2022 a slowdown from the 8.5% in July and the 40-year high of 9.1% in June.

IMPACT: NEUTRAL

Remarks: High inflation is expected to cool-off in the next 6-12 months. Inflation data is delayed, and we only know the result historically (lag indicators). This apart, inflation is always tracked on a YoY basis. In the last 5-6 months, the Consumer Price Index has gone up drastically, making a higher base.

For the inflation to stay up, the index must go up further from here, in the next 6-12 months, which is unlikely to happen. Hence the inflation will show a cool-off. Mathematically, it means, even if the CPI remains at the same level for the next 6-12 months, the inflation rate will show a cool-off due to the higher base from the past 5-6 months.

Further, the key Inflation drivers (lead indicators), being tracked daily show a downward trend already (especially oil & industrial commodities) which will contribute to the inflation coming down.

5.

Indian Equity is Fairly Valued

Nifty 50 is trading at 21 times Price to earning basis whereas 4 times Price to Book basis.

IMPACT: NEUTRAL

Remarks: If we look at the traditional valuation matrices, Nifty 50 is trading below the 5-year and 10-year average PE whereas, on price to book (PB) basis, it’s trading slightly above its 5-year and 10-year average. The India Market cap to GDP ratio is currently at 95% - higher than the average of 80%. The US is trading at 150% of its GDP, corrected from a peak of 220% - US market is still overvalued compared to India.